Is sweat equity worth less than cash?
I'm being offered to join as a partner in a startup that currently has no in-house developers. As compensation, I'm being remunerated partly with equity. Let's say 30k cash and 30k equity if my market value is 60k. But the company is treating this 30k equivalent $ as an investment for sweat equity and is saying that 30k of cash investment is more valuable to them than 30k of work and therefore is reducing the value of this 30k$ equivalent of time investment to 66% to 20k$ cash value of sweat equity. Does this make any sense?
I already make 60k of guaranteed cash and am making a risky investment myself by risking 30k of income. The way I see it, my 30k of time investment should be worth 40k of equity if anything because of the risk. Is this a proper financial practice?
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[ 3.5 ms ] story [ 36.6 ms ] threadThat said, if a company gave me a deal like that, I'd say, "Well, if $30K of cash is only worth $20K of equity to you, why should it be worth $30K of equity to me? I'm taking a $30K pay cut to work for you - give me $45K of equity to make up for it (since their equity is apparently worth only 2/3 of its cash value), or the deal's off." If they accept, you've just upped your $60K compensation to $75K. If they don't, well, you probably don't want to work for people that play games like this anyway.
Unless this is a company that started from a publicly traded shell company, the equity they're offering you is unmarketable, it's not something you can sell on the open market to get the equivalent cash (however they compute that).
Assuming you ever talk to them again, ask them how you can turn the equity into cash and then look at that for traps (e.g. "we'll buy you out" is something that at best you can enforce in the courts, which is going to be hard for such a small amount, what you'd see after paying your legal costs).
Their attempt to discount it now says it's not a priced in the future offering, what they're probably saying is that "this is a great deal, $20K today will be worth $20X K tomorrow". That completely ignores the risk side of the equation, the likelihood that the equity will be worth less than $30K when you want to cash out (most likely it'll be worth $0).
The other thing to consider is that equity is cheap* compared to cash, after all that's why they're trying to pay you partly in it.
My strong guess is that either they're idiots or they're trying to cheat you; in either case I wouldn't touch them with a 10 foot pole. Given that you're making a "guaranteed" (well, your current job could go poof) $60K in cold hard cash today, they need to make you an offer that's much, much richer if the cash is less and they're trying to make up the difference with very risky equity.
NOTE: if you don't understand something like this, if it feels "weird", it's never out of line to ask what it's all about, how it works, why they are doing it, etc. Since they are offering something unusual, it is incumbent upon them to explain it such that there is no mystery about it to you.
The real question though is what 30K of equity means also. Assuming it's common stock, common stock is often valued at less per share than invested money, which means higher number of shares (for the same valuation), but folks will sometimes talk about it with the preferred share pricing in mind.
I suggest you read up more on how investing and stock setups (capitalization tables) are done, and it probably wouldn't be a bad idea to spend $1K on a startup lawyer for advice to understand what you're negotiating if/when you're negotiating.
at the same time, it's really worth digging into and understand what they mean by whatever equity they're offering, and how they would get to whatever valuation that means. also what % of the company it is that they're offering, what stage is the company at etc., to form your own estimation of valuation of the company etc. looking at % and yr estimation of valuation can be more important than what they're saying...
good luck!