I love startups, but equity agreements are designed to favor and protect investors at the end of it all.
I had the opportunity to own equity. Here's what I learned as someone who didn't know anything about it at first most of the online guides felt too technical.
I'm based in the US. This is important because your country of residence affects things such as:
- Exercise cost
- How you will be taxed
In my case, I had the chance to own ~1.2% in equity. This translates to 1,500,000 options I could purchase to convert into shares.
To buy these options you have what's called an exercise cost. I would've needed to exercise at $0.21 per option, bringing the total cost to $315,000.
Then there are capital gains taxes.
This means the purchase of the options would be treated as income (even if no money lands in my bank account until the company sells or IPOs). The capital gains taxes are based on the last valuation of the company. For me this meant I'd be taxed as if I made several million dollars in one year by purchasing my share of the company.
Even if I could've afforded to pay the taxes, there is never a guarantee of a profitable exchange. Do not get emotional and gamble on hope. Rely on logic, facts only.
What can you afford to lose financially?
In the end, even if you can afford to pay the exercise cost and fist round of taxes, there is no guarantee you'll profit in the transaction when the company is acquired or goes public.
Investors get their money first.
Then, what's left is split amongst everyone else. You don't know how in debt and profitable the company is to actually pay out your sum.
Plus, you get double-taxed. You pay taxes a second time once you actually get the money (if you get any money).
Go down a rabbit hole on this stuff if you're ever offered equity.
