Recieved an Equity Stake offer, what next?
I mostly read and browse around on WSO so this will be my first real post. I have a unique opportunity where I lack insight to receive an equity stake in a business. Obviously I want as much equity as I can possible negotiate and I'm more interested in the longer term success of the business. I would get a salary and would not mind taking a pay cut for more equity. So far the only people really working the business are the founders/co-founders. There is no core team built outside of that. I fit a niche role in essentially bringing my existing relationships/contacts and experience in what I do (which I know there are very few people doing anything similar as I am). Thus directly affecting the bottom line, $.
I'd rather not go into the details of everything and keep myself anonymous. I need suggestions on how I can further educate myself. How would I go about consulting a professional with some knowledge and expertise? Are there sources/websites/books or anything that one can recommend to me. I'd appreciate any help!
Thanks in advance.
Are your trying to negotiate for the equity stake or they've already said we'll give you x in pure unrestricted shares/membership interest? Kinda confused on what you're asking advice for.
First get a good accountant, lawyer and tax lawyer to advise you (the latter two don't necessarily need to be from different firms but they're different individuals, and try, I say try, to get the company to spend those legal dollars). You can't receive appreciated interest in an established entity in a straight gift without incurring an ordinary income charge. This is extremely important. For example and just to use round numbers, if the IRS valuation at the time of your grant is $10MM and you recieved 10% you could be liable for a $1MM ordinary income and a 35-39% income tax on that (graduated probably $330k) even if you didn't actually get any money. And you will owe that. Tax planning can make easily 30% per year and it's difficult to make that return in any asset class. And it will suck if you owe that to the IRS when you don't actually receive those dollars (trust me). Phantom income blows.
There are multiple ways around this but it will depend entirely on the structure of the entity (LLC, s/c corp, GP/LP).
You also want the non tax lawyer to help you through the operational agreements that you're signing. You may not have much pull here but you want, for example, to not have vague clauses on their side to take away your interest. Tons of these types of issues. And things like change of interest clauses, valuation etc.
Basically, you're entering the big leagues. Get representation. I'm nearly 20 years in of doing deals and can structure the ownership of a dog house in Georgia but I always consult accountants and lawyers.
We are negotiating currently which is where I could use the most advice on for what % to ask for. Of course that all depends on a lot of factors and would require me to go into great detail. Some numbers were thrown out there but nothing concrete or in writing yet. I agree on meeting with lawyers and accountants because the idea of phantom income hasn't even crossed my mind.
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