A bit more on equity and selling a company

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Two great questions came up on the recent post on equity:

1. Should you test drive a potential recipient of equity as an employee first?

Absolutely. However, you can also set up an equity arrangement up front that handles this. Have their equity vest over time. So if they are entitled to 4%, you can have 1% vest after year one, and another percent each year until they vest at 4%. You can even divide up the vesting unequally — .5% after year 1, 2% cumulative after year 2, 4% cumulative after year 3.

If they don’t work out within the year, you can terminate them. (Personally, I hate this kind of arrangement. It creates paranoid workers).

I prefer your idea: Hire them first for a period and set specific performance goals. If they meet those goals, you agree to set them up as an equity participant. Avoid any negotiation on the equity terms since they will depend on the value this person demonstrates as well as the value of the company after their test period. In this case, I might suggest a 3-6 month trial to test them out, and then an equity arrangement with some up front equity to satisfy them.

2. How do you sell your firm? This question specifically asked about selling to “the big boys” and non-competes.

First, know what your firm is worth, and what you are willing to take for it to be happy. Second, a non-compete is often thrown into the mix as a way for companies to spread out payments; take money for any non-compete in the form of some sort of salary. Third, get a great accountant and lawyer if you face this situation, as there are all sorts of tax consequences and legal issues to prepare for.

But that’s too simple and superficial an answer. The fact is that buy outs from the big boys are complicated, and can burn you (e.g. they may just want to look “under your hood” for free and use their offer as a way to do that; or they may sign you up for an “earn out” that never materializes….). Be careful.

Andrew NeitlichAndrew Neitlich
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