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So i'm the founder and developer of a startup, when i add a guy to the company to serve as a sales man, and give him 10% of equity of the company without any salary.

Does it mean he'll receive 10% of revenue only?

OR

Does it mean he can only cash out by selling his shares?

And will he benefit if i get funding from an investor?

I know it's probably a very silly noob question, but please help

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What type of equity? For an LLC, membership interests or just profits interests? For a corporation, shares of stock or just options? – user6492 Jul 4 '11 at 21:29

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@David. Its not a silly question and the answer is it depends on the agreement from the laywers.

Typcially

  • Dividend payments paid on the share holding. This means that IF you make a profit AND you choose to pay dividends from that profit (say 20% of the profit is paid as dividends, the rest goes back into building the company) THEN he would get 10% of those dividends paid.
  • Tradesale or IPO. If you sell out or publically list for $100M in a few years then he stands to make 10% (and you 90%) of that price (assuming the percentage isn't diluted with new investors).
  • Private sale. Depending on the rules of the company he may be able to sell his shares privately to a friend or investor for an amount they agree to. Just like selling anything else, once you hand them over by default they are his to do whatever he wants to with them ... often the rules of the company says you have first right to buy the shares back again.

Talk to a lawyer who works on setting up companies and dealing with these options.

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up vote 1 down vote

Not a silly question at all.

Equity as compensation is a confusing and complex topic. If you are giving someone 10% of the equity (or ownership) of the company, then their value will generally increase or decrease proportionally with the value of the company.

If you get new investors, they may ask for equity that has preferred status to that of your regular shareholders. This may mean that the potential or real value of the equity given to your sales person changes in proportion to their original equity stake. I have created a list of the Top 11 things a startup should consider before rolling out equity to employees (http://www.slideshare.net/performensation/top-11-things-to-consider-for-stock-options-and-equity-comp). Feel free to post additional questions here and I will do my best to answer them.

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Thanks @Dan for the info and the link – Ryan Jul 7 '11 at 23:13

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