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There are lots of startups that want to provide equity in exchange for labor rather than a salary or a combination of both. Reading online it seems there are a ton of loopholes where I may not get paid in the event of liquidation, equity type etc... so is it possible to avoid the various loopholes when joining startups who offer equity? Basically the goal here is to protect my investment at all costs, like it would be with a salary position given a period of employment.

PS: Perhaps knowing various loopholes and avoiding them is the way to go, but I'd need some directions on that.

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  • Which country are you in?
    – Flux
    Commented Sep 7, 2020 at 10:56
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    Only real answer is to hire a lawyer to read your employment contract. Details are far too complicated for anyone write a helpful answer here.
    – minou
    Commented Sep 7, 2020 at 11:05
  • @Flux Ok is it based on where I'm or where the company is? I'm in US, but see lots of companies in US, UK and France following the same rule book with their hiring.
    – Jackson
    Commented Sep 7, 2020 at 11:05
  • @gaefan In that case maybe I should just skip the equity type opportunities? What benefits do they generally bring me besides the complication?
    – Jackson
    Commented Sep 7, 2020 at 11:07
  • Equity compensation in a startup is much like gambling. Most startups fail so equity is never worth anything. Join a startup because it is exciting or for the learning experience, but best to assume from the start that the equity will never be worth anything.
    – minou
    Commented Sep 7, 2020 at 11:20

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Legal parts of the agreement requires good knowledge of local laws to interpret. But since this is a Personal Finance site, we can look into the financial implications.

Equity for pre-IPO companies usually falls into high-risk, low-liquidity category of assets. It is high risk since there is no guarantee that this business takes off, and in case of default there is often little or no material assets to be liquidated, so the company is only worth as it's growing business. It is low liquidity since you can get money (in most countries/situations) only in case of IPO or acquisition of the company, and none of these are in your control, so you just sit tight hoping one or the other happens in near-enough future while the company is still doing well and you get good returns.

The situation can get more complicated if you want to leave the company after you have vested some options but there is no IPO/Acquisition event on the horizon. Then depending on the country and your agreement, you might be given a deadline of few months to either exercise your options to buy stocks at set price or leave them behind. Now you have to actually put (even more) money into (and maybe even pay taxes on) an asset that is not very liquid and still high risk.

This is not to say ESOP or equity are worthless, but to know how to asses them in a package and where to imagine them in your investment portfolio.

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    Yes. Equity in a start-up is a very high-risk asset. The sad truth is that the majority of start-ups go broke and your equity will be worth nothing. Of course some of them take off. You often hear stories about someone who got a stake in Google or Apple or Amazon when they were just starting and now they're a millionaire -- or how they sold their share for $1,000 in 1992 and if they'd kept it today it would be worth $100 million. That certainly happens. But that's the rare case.
    – Jay
    Commented Sep 7, 2020 at 14:44

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