legal, equity, investment, financing, business-structureI have started a technology consulting company through which I am provide technology services to early stage startups and people willing to create a startup. Most of the time, early stage startups have trouble finding an appropriate technology team due to time constraints, hassles of managing a technology team and finance issues. I try solve these problems by providing them my technical expertise and my team of programmers. In return, usually I work out a cash+equity model.
However, a couple of startups have shown concerns about sharing equity with a company (i.e. Ideanub) and would rather share equity with me as an individual. In that case, people who have (or will have in future) a share in my company, end up loosing the share of the equity that the startup offers me (as an individual). Also, the startups mentioned their concern, saying that the day they raise funds, the investors are not going to like that equity is shared with a company rather than an individual.
What could be the best way to sort this thing out ?
Awesome question. This is a little difficult to answer without knowing just what you want to achieve. I’ll list out a few reactions that might suit you. I think it’s appropriate to secure a lawyer representing you personally to consider these options.
Do it their way. They are right to worry what later investors will possibly think of a company on the cap table. Why do you want the company (I’ll call it YourCo) to have YOUR equity? It’s better for your sake to keep value in your name. If you make a mint when one of your clients goes IPO, then you have the cash and you can retire or invest in YourCo, at your discretion, without splitting it with anybody. To the extent you have partners who work on the same projects, you may be able to negotiate equity stakes for them as individuals, too.
Take equity personally but sign away some rights to YourCo. For example, you could contribute a broad option to YourCo to exercise a call and take the stock from you at a set price (something low, like a penny a share). It’s possible that this may violate a shareholder agreement with the client company, blocking alienation of shares. You may be able to structure it so that you can contribute any future proceeds of the client stock to YourCo. For taxes, you sold or contributed the future interest even though on paper you’ll continue to own the stock, so YourCo should either pay you money to buy the future interest or YourCo should issue you equity in acknowledgment of the contribution (unless you are sole shareholder).
Take equity in your name but pledge the shares to YourCo. This idea I’ll grant is not fully formed in my head. You should never consider it until you have experienced legal counsel consider the debt and tax consequences. That said, you might be able to pledge your equity in a client to YourCo, in exchange for money, assets, or possibly extra equity in YourCo. You would be the legal owner, but the company would hold the shares until some event occurs or fails to occur.
It’s possible and maybe likely that the shareholder agreement will block any sort of contribution, sale, pledging, or other disposition of the client stock, and this may include the disposition of future proceeds or interests. In that case, I wouldn’t try to get cute.
The most flexible position is that you own the stock and contribute to YourCo when it needs money. The client might not want a company shareholder precisely because it lets YourCo decide who effectively owns stock in the client company simply by selling interests in YourCo. If you need incentives for co-founders or employees, then try to negotiate equity stakes for them in the client companies.
Fascinating question. Thanks for asking it. I hope my rambling reactions make sense. I really think securing legal advice is your best response, if you can afford to do so.
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