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Someone that I met recently offered me an equity-only position for a non-existing business (only ideas, nothing started), and I accepted that. However, the business person insisted we wouldn't have any written agreement (such as contract) until our relationship is stable and ready.

Essentially, he gave me a verbal agreement on equity and I'm expected to work until it was time to seek legal advice. The timing is not decided by me and not defined at all. No company, no office, no funding, just a verbal agreement. I asked for legal documentation but was rejected.

Q: Is this normal for equity-only positions? Should I ask him to sign a legal document or otherwise I'd fire him?

Note: This question is not about whether I should take equity or cash. Please don't discuss about it. It's about the procedures for equity.

SmallChess
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    GET A CONTRACT!! Anything, anywhere, if it's about money or business, put that shit in writing. (I edited this ten times to be as polite as possible as I cannot fathom how people can still question whether or not to put this type of stuff in a contract, there are SO many examples of people not putting stuff in writing and getting into trouble... come on people) – user3244085 Feb 25 '17 at 18:29
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    To expand on @user3244085 comment, If it isn't written down it never happened! –  Feb 25 '17 at 22:10

2 Answers2

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NO. It's not okay to take equity without a written agreement. Established company, new company, or possible future company, it's still the same - no paper, no work.

You need a contract before doing any work. It is immaterial whether it's for equity or cash.

Since there is no company yet, the only contract you can get is from the one thinking about creating the company. You need to assess the risks of relying on his business plan, which means you need to see that plan. After all, by doing equity work you are "investing" in that business plan. Don't do equity work based on a business plan that you wouldn't invest cash in.

As this is still the idea for a business, the contract needs to limit how much work you do when. Have clauses that limits how many hours you invest in the company-to-be before it's formed, and what kind of output and time investment is expected of you at what stages of the company's progress through the business plan. Set limits, and enforce them. If you were investing cash in the business, you wouldn't keep investing your cash forever, don't invest your labor forever either.

You should also include clauses that control who "owns" your production. Until the company exists, and is able to compensate you a minimum amount, you should probably keep all copyrights for yourself. If the company never happens, maybe your work can be finished as a solo project, or re-purposed for some other business. If the copyrights don't belong to you, you can't and all your work is gone in a breath of air. Working for equity is a gamble, but that doesn't mean you can't hedge your bet.

If the other party doesn't "understand" your insistence on a contract, offer them equity in your company if they will supply a new computer, pay the monthly utility bills, obtain the development software you need, and cover the costs of your data connections, until you have time to find a lawyer and investigate an agreement for the same.

  • I think you nail it with that last paragraph, although you should emphasize the equity share will only be discussed 1-on-1, not written down. – user3244085 Feb 27 '17 at 07:53
  • @user3244085 the last clause, "until you have time to find a lawyer and investigate an agreement for the same" was an echo of the OPs prospect saying "contract later, work now." –  Feb 27 '17 at 07:59
  • Yeah but why bother right? Surely his word is enough. – user3244085 Feb 27 '17 at 11:34
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    Of course it is. The word of every freelancer is gold! We just can't trust the clients. The don't even know what they want, let alone what they mean. :-> –  Feb 27 '17 at 11:37
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You MUST have something in writing. You don't need a lawyer initially, just lay it out in detail and sign two originals in front of a notary. The notary will cost about $10 you can find one at most any bank and they will stamp each document. Detail the ownership split, expenses before payouts, initial payout schedule, who controls finances etc. If you are not on the eventual corp, keep the source code and project on your own server. You don't need to have everything in legalese. If you have to go to court over it, the doc you write will make more sense than any run-on sentence laden legal contract to a jury or mediator. And if you decide to go forward without any papers, at the very least, keep the code on your own server with no other access.

Entre Preneur
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