What do I need as proof of stock ownership in a startup?
Ok, first, everything cyniczny said applies to options, not to stock, so it’s irrelevant here. You need to figure out what their corporate structure, as has been pointed out, since an s-corporation or most forms of LLCs will pass through profits and losses. Why this could be bad is that if the company goes through a period where they are making profit but not distributing all of it (or any of it) to the shareholders, which is very common in the early stages of a business, you will have to pay the tax on this reinvested profit, but you won’t see the cash from it. In a C-corporation, which is the common structure for larger corporations or corporations that expect to become large, you do not have this concern. If you are investing a significant ammount of your time in this, you will probably want a lawyer. To look over the contract I would expect a fee of around $300. If changes are required to protect your interests, there could be negotiations and such, which might run a couple thousan
Usually shares are in the form of a number, not really a percentage The company should have an authorized (by the Board of Directors) number of shares that can be issued, and the company should be able to tell you how many shares are outstanding (already issued). So one question is – 5 percent of which one? But whatever you get, in writing, should state the number of shares, not a percentage (even though the percentage was used for calculation purposes). Also, the Board can authorize additional shares at any time. So, for example, say, that you get 5,000 shares out of a total of 100,000 shares (let’s say that 100,000 shares are both authorized and issued, for simplicity). Then the Board authorizes another 100,000 shares, and issues 50,000 of them to a venture capital company in exchange for $500,000. Now you don’t own 5% anymore. And the Board could then authorize issuing the other 50,000 of new shares to company management in exchange for “services given”, further diluting your percen
(These comments are less financially-oriented, more business sociologically-oriented.) My guess is that a “new (and risky) startup” that issues a vendor “5%” of their stocks, and doesn’t do it in writing is really “some college kids sitting around a dorm room with an idea and a friend who can code.” (If that’s the case …) If the company is going to want to be taken seriously as a startup, they’re going to need to get their act together. It’ll probably be hard for you to force the question, since it sounds like you’re not in a power position there. But you should meet with the founder(s) and explain all of your questions and concerns. Get documentation on all of it. If they’re not organized enough to have these things worked out already (that is, if they just said, “um, we need some code made for this site. Let’s give banished … uh … 5%? Banished? Sound good?”), then I doubt they’ll have the stick-to-it-iveness to keep the startup going through an IPO (heavens!) or an acquisition.
Also, how did they come up with 5%? If you’ve done $50k worth of work for them in exchange for 5% ownership, that means the company is worth $1 million. While that may sound okay for a high-tech startup with big potential, make sure you feel that your contribution is reflectled accurately in your ownership percentage. If your work has been extremely important to the existence of this company, ask for more. Paul Graham (LISP guy who started a company and sold it to Yahoo!) wrote this article about starting a startup. It is aimed at would-be founders, but it will help give you a sense of what is going on. On preview, cynicynz: Maybe I’m wrong, but is banished an employee of the firm? I didn’t read it that way. Anyway, it sounds like your describing stock options and that is definitely NOT what banished wants. Please, please do not take stock options. Since this is a startup, banished should demand straight common shares which have NO ves
Do you know what kind of corporation it is (c-corp, s-corp, LLP, etc)? You’ll have to be careful about tax consequences if the corporate structure acts as pass-through for tax purposes (e.g. a s-corp doesn’t pay corporate level taxes, but shareholders will pay when distributions are paid). Since you’ve been offered “shares,” this is probably an s-corp or a c-corp. An LLC or LLP would probably be much more complicated (and they don’t have “shares” in same sense as a corporation). An s-corp is more likely if it has a small number of shareholders (less than 75). Anyway, you’ll need some sort of share purchase agreement and I imagine your arrangement will be registered with the state in which the company is incorporated. You definitely need more than just a signed letter. And despite your desire to avoid legal fees, you’ll end up getting a lawyer. You can probably start by calling the Corporate Commission of your state, but they’ll tell you to get a lawyer too.
