3% Equity options in software company, entitles me to revenue share?
It might, but it also might not. The Board of Directors gets to decide whether and how much dividends are paid to stockholders. So this will vary from company to company and may change over time. I suggest you ask the person making the offer. That said: It looks like they offered you OPTIONS, not Shares. An option is just the right to buy stock at a given price in the future. It is extremely unlikely that you would be entitled to any dividends since you don't have an ownership stake, just a potential to be a shareholder.
"Equity could mean stock options. If that's the case if the company makes it big, you'll have the option to buy stocks cheap (which can then be sold at a huge profit) How are you going to buy those without income?  5% equity is laughable. I'd be looking for 30-40% if not better without salary.  Or even better, a salary. To elaborate, 5% is fine, and even normal for an early employee taking a mild pay cut in exchange for a chance at return. That chance of any return on the equity is only about 1/20 (94% of startups fail) There is no reason for an employee to work for no pay. An argument could be made for a cofounder, with direct control and influence in the company to work for equity only, but it would be a /lot/ more (that 30-40%), or an advisory role (5% is reasonable)  I also just noticed you mentioned ""investing"" in the startup with cash. As an angel investor, I'd still expect far more than 5%, and preferred shares at that. More like 16-20%.  Read this for more info on how equity is usually split." This is great, thank you. Can you think of any cases where expected return is greater than interest payments (like in #2) but the best choice would still be raise money through equity issuing? My intuition tells me this may be possible for an expensive company. Stock options represent an option to buy a share at a given price.  What you have been offered is the option to buy the company share at a given price ($5) starting a given date (your golden handcuffs aka vesting schedule). If the company's value doubles in 1 year and the shares are liquid (i.e. you can sell them) then you've just made $125k of profit.  If the company's value has gone to zero in 1 year then you've lost nothing other than your hopes of getting rich. As others have mentioned, the mechanics of exercising the option and selling the shares can typically be accomplished without any cash involved.  The broker will do both in a single transaction and use the proceeds of the sale to pay the cost of buying the shares.  You should always at least cover the taxable portion of the transaction and typically the broker will withhold that tax anyways.  Otherwise you could find yourself in a position where you have actually lost money due to tax being owed while the shares decline in value below that tax.  You don't have to worry about that right now. Again as people have mentioned options will typically expire 10 years from vesting or 90 days from leaving your employment with the company.  I'm sure there are some variations on the theme.  Make sure you ask and all this should be part of some written contract.  I'm sure you can ask to see it if you wish.  Also typical is that stock option grants have to be approved by the board which is normally a technicality. Some general advice: "Many companies (particularly tech companies like Atlassian) grant their employees ""share options"" as part of their compensation. A share option is the right to buy a share in the company at a ""strike price"" specified when the option is granted. Typically these ""vest"" after 1-4 years so long as the employee stays with the company. Once they do vest, the employee can exercise them by paying the strike price - typically they'd do that if the shares are now more valuable. The amount they pay to exercise the option goes to the company and will show up in the $2.3 million quoted in the question." "Recently, I asked about what the company valuation is and how many   shares does my 4% represent.CFO told me that there is no point to talk   about ""shares"" or ""stock"" since the company is not public. Is it   right? No, it is wrong. Shares and stocks exist regardless of how they can be traded. Once a company is formed, there are stocks that belong to the owners in the proportion of the ownership. They may not exist physically, but they do exist on paper. As an owner of 5% of the company, you own 5% of the company stocks. I asked if my investor portion equity will be subjected under a   vesting schedule, CFO said yes. That doesn't make sense to me, because   I bought those 4%? Aren't those supposed to be fully vested? I agree   to my employee equity to be vested. Doesn't make sense to me either, since your money is already in their pocket. But I'm not sure if its illegal. If that's what is written in the signed contract - then may be its possible to have that situation. But it doesn't make much sense, because these shares are granted to you in return to your money, not some potential future work (as the 1% employee's portion). You already gave the money, so why wouldn't they be vested? Best to read the contract upon which you gave them your money, I really hope you have at least that and not just gave them a check...." At the most basic level, the employee is getting a share of ownership in the company and would get a percentage of the sales price. That said, as littleadv alluded to, different share classes have different priorities and get paid in different orders. In a bankruptcy, for example, some classes almost never get paid in practice because they are so far down the ladder of priority.  The first step you should take would be to try to clarify what you are getting with the company itself. Failing that, contact a financial professional or an attorney in your area who can read the terms and give you a better understanding of the contract before you sign. Well it depends on whether or not your differentiating against. If its capital stock or stock as in a share certificate in the company. If its a share in the company then in my opinion using Equity would be best as it is a form of an asset and does refer to a piece of ownership of the entity. I wouldn't consider a share of stock a service, since the service to you is say Facebook or the broker who facilitates the transaction of buying or selling FB stock. I also would not consider it a Capital Good, as the Capital Good's would be the referring to the actual capital like the servers,other computer equipments etc. Yes, what they said. You don't mention where you are on the totem pole. Are you reporting to the top dog, or are you 3 levels down? Not to be a downer, but until you know your cut, I'd not get too excited either way. 1000 shares/options of a LinkedIn turned to nearly $100K. Nothing to sneeze at, to be sure, but not enough to retire, nor bother contacting a lawyer.  The details of the equity should be spelled out clearly, nothing against Lawyers, but it's likely to be wasted money. You're talking about NQO - non-qualified stock options. Even assuming the whole scheme is going to work, the way NQO are taxed is that the difference between the fair market value and the strike price is considered income to you and is taxed as salary. You'll save nothing, and will add a huge headache and additional costs of IPO and SEC regulations. Profits and losses in a partnership, LLC or S-corp are always reported proportional to the share of ownership. If you have a 30% share in a partnership, you will report 30% of the profit (or loss) of the respective tax year on your personal return. If you look at Part II, section J of your K-1, it should show your percentage of ownership in the entity. All numbers in Part III should reflect the amount of your share (not the entity's total amounts, which will be on Form 1065 for a partnership): Yes. Private companies have shares, they're just not liquid and there may be restrictions around selling them; founders get shares when they found a company (not options), as do VCs that invest. An options pool is oftentimes created as a result of a VC financing (when the cap table is being carved up and the existing owners are being diluted, anyway) for the purposes of attracting future employees. Get involved a lawyer and Accountant. Without it you may not be sure what you are getting. What exactly will 30% mean for me? It will mean exactly what gets written in contract. It can mean you are owner of 30% of the company. If this is structured as partnership, it would also mean you are party to 30% loss. It can mean by current valuation, you get x fixed shares. In future if the directors creates more shares, your % ownership can get diluted. Or anything else. It all depends on what is written in contract and how the contract is structured. Is there anything I should I be aware of before agreeing? Get a draft and talk to a Lawyer and Accountant, they should be able to tell you exactly what it means and you can then decide if you agree to it or not; or need this contract worded differently. yeah but most likely, it's a 1x liquidation preference. The startup isn't going to generate cash flows enough to pay off the initial investment to the investor. Technically it isn't exactly specified as only triggered on a liquidation event because OP didn't specify the real legal language but it seems likely that's the case. Point 2 is exactly what a liquidation preference is. No way the owner of the company is participating in anything until the investor gets his initial investment back. "First, you mentioned your brother-in-law has ""$100,000 in stock options (fully vested)"". Do you mean his exercise cost would be $100,000, i.e. what he'd need to pay to buy the shares? If so, then what might be the estimated value of the shares acquired? Options having vested doesn't necessarily mean they possess value, merely that they may be exercised. Or did you mean the estimated intrinsic value of those options (estimated value less exercise cost) is $100,000? Speaking from my own experience, I'd like to address just the first part of your question: Have you treated this as you would a serious investment in any other company? That is, have you or your brother-in-law reviewed the company's financial statements for the last few years? Other than hearing from people with a vested interest (quite literally!) to pump up the stock with talk around the office, how do you know the company is: BTW, as an option holder only, your brother-in-law's rights to financial information may be limited. Will the company share these details anyway? Or, if he exercised at least one option to become a bona-fide shareholder, I believe he'd have rights to request the financial statements – but company bylaws vary, and different jurisdictions say different things about what can be restricted. Beyond the financial statements, here are some more things to consider: The worst-case risk you'd need to accept is zero liquidity and complete loss: If there's no eventual buy-out or IPO, the shares may (effectively) be worthless. Even if there is a private market, willing buyers may quickly dry up if company fortunes decline. Contrast this to public stock markets, where there's usually an opportunity to witness deterioration, exit at a loss, and preserve some capital. Of course, with great risk may come great reward. Do your own due diligence and convince yourself through a rigorous analysis — not hopes & dreams — that the investment might be worth the risk." what do you mean by abnormal amount of risk on day to day operations? and upfront ill more than likely need quite a bit of capital. as far as partnership I'd be the sole owner for now. unless I find a better option along the way. also thank you for all your help.