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What is the risk in owning 10% equity in a startup? I am being asked to provide my time to help build leads for the business.

Dallas, TX |

A startup is offering me 10% equity in their company if I devote my time to helping them acquire X number of leads for their business. There is currently no salary or pay until they start turning a revenue.

My question is what am I liable for? What are the risks?
I'm not devoting any of my actual money. I'm just dedicating some of my time to help get them some leads. Specifically, they're reaching out to local businesses and want gift cards in exchange for traffic to their websites/place of business.

If this startup ends up getting sued or goes bankrupt or something later on down the line, am I then responsible for 10% of whatever ends up happening? (both good and bad?)

Attorney Answers 4


You could be held 100% liable for many things under certain circumstances. It would be prudent to read up a good bit and consult with an attorney before committing.

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Thanks, the owner of the LLC is drafting up the contract now... I'll find a lawyer to consult with before signing anything.


Accepting stock for compensation can be very complicated and before you do so you should definitely speak to a business attorney familiar with start-ups. Without more details it is hard to comment in much details because there are so many ways stock could be awarded to an employee. However, just to give you one tax consideration, take a look at the great post by this attorney (below):

It should at least give you some idea of what risks are involved in not using an attorney and the ramifications of not making informed decisions on equity compensation. Apart from this one small, but important consideration, as my colleague indicated there could be a lot at risk if not handled properly.

Best of luck.

The posting attorney is admitted to the U.S. Tax Court and authorized to represent clients in all 50 states before the IRS. Outside of IRS matters, the posting attorney is licensed to practice law generally in the State of Texas and no other state. The information provided in this post is for general educational purposes only and should not be relied upon as legal advice by any party. No attorney-client relationship is formed with any party by the mere posting (or reading) of this information on the AVVO website. Circular 230 Disclaimer - Advice given in this response cannot be used to eliminate penalties with the IRS or any other governmental agency

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There are so many things to consider. You need to visit with an attorney and have all the relevant paperwork from the business for which you are considering working. Your rights, responsibilities, and obligations, will arise from the business structure and agreements.

The above statements are provided as general information and not intended as legal advice. Each matter has its own set of unique circumstances that cannot be adequately addressed without consultation. You are strongly advised to hire an attorney licensed to practice law in your state to represent you.

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Before you make a decision, you will want a copy of the company's bylaws, which will spell out your rights and responsibilities should you become a shareholder. Being a shareholder will not guarantee that you will be paid dividends, or that you will have any input into that decision. And my colleagues are correct that in some circumstances, you could incur personal liability. Perhaps another option to consider would be a commission agreement that pays you a percentage of increased revenue. At any rate, I recommend sitting down with an attorney to review anything before you sign it. Best of luck to you!

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