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I have been offered some equity in a startup and I was wondering if I own X% equity (I own X% of the company) does that mean I'm also X% liable should the company be sued? Do I own/am responsible for X% of the debt?

I haven't seen any of the legal paperwork to go along with it so maybe it's all explained in there but I hoped to get the opinions of answers.onstartups's readers.

(In case in matters, it's a California INC. C-Corp I'm assuming. I'm also assuming that it was incorporated in CA too.)

Thanks

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3 Answers

up vote 4 down vote accepted

No. You are not liable for any debt. Debt is separate from equity. The company is liable for its debt. It issues equity to raise money and reward employees, etc.

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up vote 1 down vote

You are generally shielded from liability but there are situations in which you could find yourself liable. For wages if you are considered a manager of the company and the company goes into bankruptcy; if there is a reason to "pierce the corporate veil" meaning, you treated the funds of the company as a personal bank account and creditors didn't get paid.

If you are operating the business within the corporations laws of California, you should not become liable for the debts of the company, with the exeptions above.

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up vote 0 down vote

As I understand it, one of the big benefits of incorporation is to shield the owners (equity holders) from the company's liabilities.

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