Earning an Increasing Amount of Equity over Time
Q: How do you create a legal contract that will increase the amount of equity I earn over time working at a startup?
A: This is a tricky issue that comes up all of the time in a startup context, it is usually not handled well, and often leads to a bad business divorce. But because startups cannot afford the expensive legal fees to put all of this together, I created an app to quickly and easily put the necessary legal agreements in place to do it right, to protect both the startup company and the consultants working for sweat equity (Sweat Equity | Legal Agreements).
The contract you need is a Sweat Equity Agreement. A Sweat Equity Agreement is an overall agreement that controls your relationship with the company that clarifies that the company owns your deliverables, that you are bound by restrictive covenants (proprietary information, non-compete, non-solicit, confidentiality), and includes dispute resolution provisions.
Next, your work should be completed under separate Statements of Work (SOWs) that clarify what work you will perform and how much equity you will receive in exchange. Create as many SOWs per as you need to stay on track, change the mix of Cash and Sweat Equity on each SOW, establish clear deadlines, payment timing, and acceptance guidelines for each SOW.
Upon acceptance of each SOW’s deliverables, you are then issued the equity. But be careful, because there could be adverse tax consequences. That’s why I prefer warrants in this situation.
Read more about the details on my recommended approach in our Sweat Equity 101 ebook, included in our Sweat Equity Document Kit.
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