Offering Equity

[jdwilliams]

Oklahoma,

I am wanting to offer someone a 20% equity stake in my start-up company. My question is how difficult would it be for me(majority owner) to change his ownership level? As majority owner can I just one day decide, well your not contributing as much as I thought so now your 10%... If he is locked in on that, can I set up in the contract some way to "re-evaluate" contract after a certain period of time?

Any articles, links, or advice would be greatly appreciated.

 

[eerelations]

You absolutely must have an attorney draft a contract like this for you. Amateurs on message boards won't be able to do this. (Even the attorneys here won't be able to do this for you.)

 

[tranquility]

You can't really structure a contract that way as it has tax ramifications. Changing equity is a transfer of wealth. While you can make a contract to transfer wealth with specific criteria, doing so without ascertainable standards would be a problem on many levels. At the very least, the transfer back to you would have to be reported as income in a barter transaction.

 

[jdwilliams]

So you just hope people don't just sit on their ass after signing a 20% equity stake in the company? There is no way to ensure they actually contribute after signing?

 

[justalayman]

So you just hope people don't just sit on their ass after signing a 20% equity stake in the company? There is no way to ensure they actually contribute after signing?

why would they be required to do anything? If you want them to do something to earn the equity, then include that in a contract. Otherwise your question mentions nothing about them being required to do a darn thing.

 

[jdwilliams]

why would they be required to do anything? If you want them to do something to earn the equity, then include that in a contract. Otherwise your question mentions nothing about them being required to do a darn thing.

Ok, so let's say this person has a specific role associated with the 20% in the contract. Let's say he does not end up following through with his side of the bargain. What then?

 

[Ohiogal]

Ok, so let's say this person has a specific role associated with the 20% in the contract. Let's say he does not end up following through with his side of the bargain. What then?

You need a properly drafted contract do spell out the consequences, ramifications and rewards. You don't. Hence, if you gave someone 20% equity that is a gift. They didn't have to do ANYTHING unless your contract specified it. They don't owe you anything unless the contract specified it. You can't take it back unless the contract specified so. In other words, what does the contract state? If you don't have a contract, you have nothing.

 

[jdwilliams]

Thanks for all of the replies. Very helpful.