Startups Stack Exchange Archive

I was promised 10% on company exit - how to phrase it in the contract?

• posted by: COO on 2015-11-30
• tagged: equity, contracts, stock-options, exit
• score: 4

I work with the company for many years and they want me on-board full time as an exec.

I am involved in the process of drafting a contract. They want to give me the 10% of company but only on event of the company exit.

What should I keep in mind when drafting or reviewing this portion of a contract?

Also, I spend already many years with the company and would like to keep that 10% as an option even if I leave a company after few years. Say I leave them after 5 years but 1 year later they got sold.

Some ideas / questions:

• I’ve read about accelerated vesting on exit. I was thinking that this can be used to vest equity in ‘change of control’ or IPO.
• Perhaps it would be better to use options instead of equity, since company is reluctant to give away 10% shares before the exit. My thinking is that receiving options that can be cashed in the event of exit means I can keep them even if I leave the company.
• Not sure if non-dilution clause is a good idea, from what I read it is frown upon everywhere.

Answer 11637

• posted by: Sarah Stensberg on 2016-12-03
• score: 2

I definitely agree with replies that you should be talking to a lawyer. With that being said, you need to make sure that two things are clear before entering an agreement:

1) Is your stock preferred or common? Preferred means that on exit, your stock will be first to be paid out (along with other preferred stock). Common stock means that you will be paid out AFTER preferred stock is paid. A bit more on that here.

2) Double check what the investors/executive team have set the liquidation preference to. If it is more than 1X, you could get screwed over when the company is sold. You can read more about that here: How Liquidation Preferences Work

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