The Dangers and Pitfalls of Trading Dollars for Equity in a Startup


Recently, I read an article in the New York Times about the pitfalls of taking equity in startups. One big takeaway was simple: how fast things can change in a minute. Startup Good Technology started 2015 off on a great track – its executives and employees expected to launch an IPO late in the year. A few months later, however, the company looked set for financial troubles.

The investors who invested capital into Good Technology made off just fine when dreams of an IPO were dashed and the company was sold to Blackberry. They got a payout. However, the employees did not, as the value of the shares of stock they held in Good Technology plummeted. It was more than just a bad investment outcome, since they actually had already paid taxes on the stock they held.

What can be learned from this? Don’t accept equity-only compensation plans as an employee of a startup. As with any investment, make sure you achieve a healthy balance of equity and cash compensation. Ask your supervisor/manager for updates on company direction and financials from time-to-time, to see if you should be worried about anything. They won’t take it as a bad sign, but rather see it as a responsible commitment to the company. These steps will give you job security, while also proving your commitment to your employer.

Click here to read the full article in the New York Times. I highly recommend it.