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I've been doing freelance work for a start-up, but now instead I have been offered 1% equity into the start-up for the role of an advisor. The vesting schedule is 48 months. The expectation is for me to provide 5 hours of my time each week for the advisory role. This allows me to spend some time doing other freelancing. The 5 hours commitment is unpaid. The contract states I will be treated as an independent contractor rather than an employee.

This is all new to me; shares/stocks/equity always confused me.

  • Is this a normal kind of arrangement? Especially given the fact the 5 hours commitment on my part is not paid in cash, but from my understanding the equity is my compensation?

  • Should I ask to be paid for the 5 hours, or is the whole idea of equity vesting to provide services based on future compensation when selling the shares?

  • Are there any financial risks?

I've got a full time job and mainly doing freelancing on the side, so I'm not relying solely on the equity investment.

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    The most important questions are: Do you actually get stock units, or just options to buy stock? Is the company already publicly traded? If not, then it would be very hard to sell those stocks. Are you aware that you might need to pay tax on that equity without being able to sell the stocks? My opinion: I had equity in 5 companies during my career, only once I got some money out of it. All other companies when bankrupt. I would never accept equity as the only form of compensation. Feb 16 at 17:25
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    @spickermann thanks. I think it's options as the agreement says "you will be granted an option to purchase X shares of the Company’s common stock (the “Option”). The exercise price per share of the Option will be determined by the Board when the Option is granted." Does that mean I pay tax only if I sell the shares? What percentage would the tax be?
    – Kakalokia
    Feb 16 at 18:20
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    That means the agreement is: That the company allows you to buy a number of shares. And they will not tell you what the price will be until you actually buy the shares. They can just make the shares at that time so expensive that it is not reasonable for you to buy them. And at that point you will have worked for nothing with no risk and cost for the company. Feb 16 at 20:49
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    @Kakalokia - So is 1% of annual revenue of the company after expenses worth more than 520 hours at your normal hourly rate? Keep in mind if the company is operating at a loss your 1% is worthless. You also have to purchase this 1% and it’s just not in exchange for 520 hours of your service. You also have to pay tax on income. When you pay it depends on the type of income and when you realize the gains. Sweat equity is one thing, that would be ownership of the company, in exchange for your services. Having to purchase that equity makes you no different the owners neighbor who did nothing
    – Donald
    Feb 16 at 22:31
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    Thanks all for the advice. My gut feeling told me it wasn't worth the effort, and I think your explanations have confirmed that. Cheers.
    – Kakalokia
    Feb 16 at 23:31

3 Answers 3

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First question - is this a normal kind of arrangement?

It's not uncommon, though advisory sweat equity generally is on the leadership/board level with startups. I don't know what freelance work you are doing, but that's less common for line employees, and this is where I would generally start to worry "why if the business is so amazing they would rather give me part of the company than money", as this will cost them a lot more if that big exit happens. Often enough that it's worth mentioned it's used to get free labor out of people.

Should I ask to be paid for the 5 hours, or is the whole idea of equity vesting to provide services based on future compensation when selling the shares?

That's the whole point of their offer as I understand it. You can refuse it, or take it, or negotiate, up to you. Mind that unless they are publicly traded, company by-laws will almost always prohibit trading of shares without board approval.

Are there any financial risks?

The most obvious: business goes nowhere and you did all this work for free.

Also check if you are getting options or actual company stock, those are very different things (way out of scope for here to explain it, google "stock options vs stock").

And then there is issue of taxation, which you may have to pay now if it's stock, or down the line if the options are ever executed if those are options we are discussing here.

But you know who to ask about this? The company offering you stock, and if their answer is "ummm", they probably don't have a good clue on what they are offering.

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  • Thanks for the reply. My freelance is IT/software dev. The business is not public yet. I think it's options as the agreement says "you will be granted an option to purchase X shares of the Company’s common stock (the “Option”). The exercise price per share of the Option will be determined by the Board when the Option is granted."
    – Kakalokia
    Feb 16 at 18:17
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    @Kakalokia "not public yet", for company to go public is a substantial event, very few ever make it, just to manage your expectations a bit.
    – Aida Paul
    Feb 16 at 19:25
  • Fewer than few ever make it.
    – Donald
    Feb 16 at 22:28
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Think about it like this: you work for them for free for four years and at the end they give you one single lottery ticket. 99% chance this lottery ticket is a worthless piece of paper. 1% chance it is worth some large amount of money, well above what you would have made at your normal hourly rate for those four years. Should you take this deal? Probably not, unless you are independently wealthy and can afford to gamble with 4 years salary. Most people would hedge their bets and say "my normal hourly rate is 100 but I'm willing to work for 80 if you throw in some lottery tickets"

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Strong recommendation to tell them you need at least enough actual pay to live on. I've seen folks be very, very badly burned when they accepted anything less.

Unless, perhaps, you have other sources of income and can afford to (and want to) play starving artist. And even then, multiply the likely value of those options by the odds of the venture succeeding well enough to reach that value. Remember that if they can't raise enough capital to pay staff at all, that means nobody is willing to risk (more) venture capital on them.

Honestly, even if you think this will be the best thing since sushi, you shouldn't work for free without being given a stake in the company now.

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    OP states that they already have a full time job and the freelancing is only a side gig
    – Hilmar
    Feb 17 at 15:23
  • Even as a side gig, unless you are exceptionally enthusiastic about the project and would work on it for no pay at all (eg open-source), I'd try suggesting they at least pay minimum wage. As the old song has it, "There'll be pie in the sky when you die (that's a lie)"
    – keshlam
    Feb 17 at 15:31

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