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I am a coder and have very little in-depth business knowledge. I was recently approached about joining a very promising startup with a great idea. Only problem is that they were unfunded and would need me to work for equity which i have never done before. So in a nutshell my question is this, as i am the technical person and really the only one that is investing a billable commodity, is there anything i can ask for in a contract that assures me some sort of return if the business never takes off or just dies? None of this is being done in bad faith and i have already asked them and they have agreed to me asking around for a situation that makes sense. Any ideas or suggestions would be appreciated.

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In this situation it is very unlikely you are going to get anything if the business doesn't work out, you just need to make sure you are compensated enough for the gamble you are taking (ie. if the business succeeds and you end up getting paid what you would have in a normal company, that's not enough). Work out how much equity/reward makes the risk worthwhile to you and there you have your deal. If what you want is higher than they will give, then move on.

One thing you mentioned that is worth pointing out, technical skills aren't the only billable commodity, don't undervalue other peoples contributions because it's not coding, that will likely lead to conflict.

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Ok, i appreciate that answer ... As a group we did discuss the fact that they would be willing to sign a promissory note to ensure that i would end up with a least a portion of my time compensated for if the venture didnt pan out. They are willing to sign as individuals. My question is this: Can a promissory note be issued in a scenario like this where I am not lending them money but rather a service that we agreed on the value of? – Amin Brodie Dec 22 '11 at 0:21
I don't know how legally binding it is, but of course they can issue one. It might come down to their integrity as to whether they honour it or not. – Joel Friedlaender Dec 22 '11 at 0:23
Payment of the promissory note does not come down to integrity. It's a matter of legal process. (Well, this may be US specific.) When a company goes into bankruptcy it has to pay taxes, then salaries, then debts, and the payment of debts will be determined by the order in which creditors make their claims known against the failed business. – user2757 Dec 22 '11 at 18:36
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Amin, you need to understand a few things. Try to follow even though much of this won't make much sense at present.

First of all, a business (like a corporation, or an LLC, or a Limited company) is created specifically to shield the owners of the business from debt in case the business fails. This works directly to YOUR disadvantage in this case.

If a business fails typically it goes into bankruptcy proceedings. When a company is bankrupted, it must follow a precedence in paying debts that is imposed by the court system. First comes the taxes owing to the government. Next comes salaries. So if back taxes against the company wipe out the company's cash assets, employees may not get paid. Now, assuming that all employees get paid, NEXT comes any debtors - like those holding promissory notes. And there will likely be a lot of people in line ahead of you.

So if the business fails, you will not see anything at all in exchange for your time. Even the work you performed may be appropriated by the court as an asset of the business.

Second major point: you are foregoing your salary - working for free - in the hope that you receive a payoff much greater than the salary in terms of equity appreciation. Even if the startup succeeds, unless you are one of the founders of the business, the likelihood of your profiting in terms of multiples of the salary that you sacrificed by working for free is extremely low.

Essentially you can figure that at very best you are working for free for a period of time in order to buy yourself a possible job in the future.

I consider this opportunity that you are looking at quite dubious. In other words it's an extremely poor bet and almost everything is against you.

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Wow Don, Thank you so much for that great explanation...Really puts the situation into perspective for me. – Amin Brodie Dec 22 '11 at 21:38
Well, please upvote me if this answer really did help and you have not done so. As far as your initial question - any coder who is not a founder or member of the executive board really needs to receive market pay for their work. That's your answer - the only assurance you have is whatever you are paid. You can be absolutely certain that everyone else who places anything of value at risk for the startup will make certain that they receive whatever is coming to them at the end. As an employee, you don't have much leverage once you perform your work for the business. – user2757 Dec 22 '11 at 23:00

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