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If a company is in debt, do employees with equity have any financial obligation?

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4

If I choose to work for salary + equity, and the company loses and/or is in debt, am I obligated to pay a part of the company debts?

Is it common in the startup world?

startup equity

share|improve this question

edited 2 days ago

Mister Positive♦

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asked Oct 13 at 22:06

1da1da

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  5
  

  
  
  
  
  
  

  
  
  Might need to ask this in the Law S.E. as it is not about the main goal of this stack: navigating the workplace. What kind of company is it anyway, is it a limited liabilty?
  
  – solarflare
  Oct 13 at 22:34
  

  
  
  
  


• 
  
  
  

  
  3
  

  
  
  
  
  
  

  
  
  It's common for startups to fall to pieces
  
  – Kilisi
  Oct 13 at 22:35
  

  
  
  
  


• 
  
  
  

  
  1
  

  
  
  
  
  
  

  
  
  @solarflare: or Money.SE since the question pretty much boils down to a stockholder's obligations.
  
  – Flater
  Oct 13 at 22:49
  

  
  
  
  


• 
  
  
  

  
  3
  

  
  
  
  
  
  

  
  
  Seconding advice to take it to Money or Law, but in either place probably the first question they'll ask you is "is your company a LLC?"
  
  – Geoffrey Brent
  Oct 13 at 23:08
  

  
  
  
  


• 
  
  
  

  
  8
  

  
  
  
  
  
  

  
  
  It will depend both on how the company is structured (partnership, limited liability corporation) and on local laws. Even if it were not off topic it would need a lot more information for a useful answer.
  
  – Patricia Shanahan
  Oct 13 at 23:37
  

  
  
  
  

 | 
show 1 more comment

4

If I choose to work for salary + equity, and the company loses and/or is in debt, am I obligated to pay a part of the company debts?

Is it common in the startup world?

startup equity

share|improve this question

edited 2 days ago

Mister Positive♦

76.7k4444 gold badges245245 silver badges296296 bronze badges

asked Oct 13 at 22:06

1da1da

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1da is a new contributor to this site. Take care in asking for clarification, commenting, and answering.
Check out our Code of Conduct.

• 
  
  
  

  
  5
  

  
  
  
  
  
  

  
  
  Might need to ask this in the Law S.E. as it is not about the main goal of this stack: navigating the workplace. What kind of company is it anyway, is it a limited liabilty?
  
  – solarflare
  Oct 13 at 22:34
  

  
  
  
  


• 
  
  
  

  
  3
  

  
  
  
  
  
  

  
  
  It's common for startups to fall to pieces
  
  – Kilisi
  Oct 13 at 22:35
  

  
  
  
  


• 
  
  
  

  
  1
  

  
  
  
  
  
  

  
  
  @solarflare: or Money.SE since the question pretty much boils down to a stockholder's obligations.
  
  – Flater
  Oct 13 at 22:49
  

  
  
  
  


• 
  
  
  

  
  3
  

  
  
  
  
  
  

  
  
  Seconding advice to take it to Money or Law, but in either place probably the first question they'll ask you is "is your company a LLC?"
  
  – Geoffrey Brent
  Oct 13 at 23:08
  

  
  
  
  


• 
  
  
  

  
  8
  

  
  
  
  
  
  

  
  
  It will depend both on how the company is structured (partnership, limited liability corporation) and on local laws. Even if it were not off topic it would need a lot more information for a useful answer.
  
  – Patricia Shanahan
  Oct 13 at 23:37
  

  
  
  
  

 | 
show 1 more comment

If I choose to work for salary + equity, and the company loses and/or is in debt, am I obligated to pay a part of the company debts?

Is it common in the startup world?

startup equity

share|improve this question

edited 2 days ago

Mister Positive♦

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asked Oct 13 at 22:06

1da1da

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edited 2 days ago

Mister Positive♦

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asked Oct 13 at 22:06

1da1da

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edited 2 days ago

Mister Positive♦

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edited 2 days ago

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edited 2 days ago

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2 Answers
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8

Generally, no, equity-investors risk only the capital they contribute. If a company is liquidated or restructured, the debt-holders have first claim on assets. You, as an equity-holder, may only make claims on assets after the debt-holders are made whole.

---

However, what I say above is a simplification and not true of all corporate structures. Some common exceptions to be mindful of:

• In a sole proprietorship, your personal assets are at risk if the firm’s liabilities exceed firm assets.


• In partnerships, the personal assets of general partners are at risk if the firm’s liabilities exceed firm assets. This is not true for limited partners.
  


• Individuals may file civil suits to reclaim losses from your personal assets.

---

As an additional aside, you’ll likely not receive equity compensation - instead, you’ll receive options. In the most common form, these options enable you to buy equity from the firm at a pre-determined price at a time in the future, specifically after an IPO. Options lack the obligations and rights of equity, but have a similar financial behavior - and thus are a favored way of providing equity-like compensation to employees of new ventures.

share|improve this answer

edited Oct 14 at 3:01

answered Oct 14 at 2:55

JayJay

9,27422 gold badges2525 silver badges5454 bronze badges

• 
  
  
  

  
  

  
  
  
  
  
  

  
  
  " If a company is liquidated or restructured, the debt-holders have first claim on assets..." - The new trend is to protect institutional investors and push the risk on regular shareholders, ordinary investors and depositors. See, for example, Cypriots challenge "bail-in" to fight for lost savings. That kind of perversion will likely spread to all verticals.
  
  – jww
  7 hours ago
  
  

  
  
  
  

add a comment
 | 

0

It's possible to setup an entity such that employees with equity can wind up with financial obligations if the company goes bankrupt. But I've never heard of anyone setting up a company in this way and it would seem to be an incredibly foolish thing to do.

share|improve this answer

answered Oct 14 at 2:10

David SchwartzDavid Schwartz

4,74822 gold badges1717 silver badges2424 bronze badges

• 
  
  
  

  
  2
  

  
  
  
  
  
  

  
  
  Well, I guess a ponzi scheme does this, where you pay the company to "work" for them... but obviously that's pretty bad and you don't want to do this.
  
  – Nelson
  Oct 14 at 2:16
  

  
  
  
  


• 
  
  
  

  
  1
  

  
  
  
  
  
  

  
  
  Nelson: In that case you lose your investment. A company scheme where you can lose more than your investment is rare. (However, If a limited company gives a director a loan instead of salary, which can be done to save/avoid taxes, that loan has to be repaid if the company goes bankrupt).
  
  – gnasher729
  Oct 14 at 9:41
  
  

  
  
  
  

add a comment
 | 

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8

Generally, no, equity-investors risk only the capital they contribute. If a company is liquidated or restructured, the debt-holders have first claim on assets. You, as an equity-holder, may only make claims on assets after the debt-holders are made whole.

---

However, what I say above is a simplification and not true of all corporate structures. Some common exceptions to be mindful of:

• In a sole proprietorship, your personal assets are at risk if the firm’s liabilities exceed firm assets.


• In partnerships, the personal assets of general partners are at risk if the firm’s liabilities exceed firm assets. This is not true for limited partners.
  


• Individuals may file civil suits to reclaim losses from your personal assets.

---

As an additional aside, you’ll likely not receive equity compensation - instead, you’ll receive options. In the most common form, these options enable you to buy equity from the firm at a pre-determined price at a time in the future, specifically after an IPO. Options lack the obligations and rights of equity, but have a similar financial behavior - and thus are a favored way of providing equity-like compensation to employees of new ventures.

share|improve this answer

edited Oct 14 at 3:01

answered Oct 14 at 2:55

JayJay

9,27422 gold badges2525 silver badges5454 bronze badges

• 
  
  
  

  
  

  
  
  
  
  
  

  
  
  " If a company is liquidated or restructured, the debt-holders have first claim on assets..." - The new trend is to protect institutional investors and push the risk on regular shareholders, ordinary investors and depositors. See, for example, Cypriots challenge "bail-in" to fight for lost savings. That kind of perversion will likely spread to all verticals.
  
  – jww
  7 hours ago
  
  

  
  
  
  

add a comment
 | 

8

Generally, no, equity-investors risk only the capital they contribute. If a company is liquidated or restructured, the debt-holders have first claim on assets. You, as an equity-holder, may only make claims on assets after the debt-holders are made whole.

---

However, what I say above is a simplification and not true of all corporate structures. Some common exceptions to be mindful of:

• In a sole proprietorship, your personal assets are at risk if the firm’s liabilities exceed firm assets.


• In partnerships, the personal assets of general partners are at risk if the firm’s liabilities exceed firm assets. This is not true for limited partners.
  


• Individuals may file civil suits to reclaim losses from your personal assets.

---

As an additional aside, you’ll likely not receive equity compensation - instead, you’ll receive options. In the most common form, these options enable you to buy equity from the firm at a pre-determined price at a time in the future, specifically after an IPO. Options lack the obligations and rights of equity, but have a similar financial behavior - and thus are a favored way of providing equity-like compensation to employees of new ventures.

share|improve this answer

edited Oct 14 at 3:01

answered Oct 14 at 2:55

JayJay

9,27422 gold badges2525 silver badges5454 bronze badges

• 
  
  
  

  
  

  
  
  
  
  
  

  
  
  " If a company is liquidated or restructured, the debt-holders have first claim on assets..." - The new trend is to protect institutional investors and push the risk on regular shareholders, ordinary investors and depositors. See, for example, Cypriots challenge "bail-in" to fight for lost savings. That kind of perversion will likely spread to all verticals.
  
  – jww
  7 hours ago
  
  

  
  
  
  

add a comment
 | 

Generally, no, equity-investors risk only the capital they contribute. If a company is liquidated or restructured, the debt-holders have first claim on assets. You, as an equity-holder, may only make claims on assets after the debt-holders are made whole.

---

However, what I say above is a simplification and not true of all corporate structures. Some common exceptions to be mindful of:

• In a sole proprietorship, your personal assets are at risk if the firm’s liabilities exceed firm assets.


• In partnerships, the personal assets of general partners are at risk if the firm’s liabilities exceed firm assets. This is not true for limited partners.
  


• Individuals may file civil suits to reclaim losses from your personal assets.

---

As an additional aside, you’ll likely not receive equity compensation - instead, you’ll receive options. In the most common form, these options enable you to buy equity from the firm at a pre-determined price at a time in the future, specifically after an IPO. Options lack the obligations and rights of equity, but have a similar financial behavior - and thus are a favored way of providing equity-like compensation to employees of new ventures.

share|improve this answer

edited Oct 14 at 3:01

answered Oct 14 at 2:55

JayJay

9,27422 gold badges2525 silver badges5454 bronze badges

share|improve this answer

edited Oct 14 at 3:01

answered Oct 14 at 2:55

JayJay

9,27422 gold badges2525 silver badges5454 bronze badges

answered Oct 14 at 2:55

JayJay

9,27422 gold badges2525 silver badges5454 bronze badges

answered Oct 14 at 2:55

JayJay

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0

It's possible to setup an entity such that employees with equity can wind up with financial obligations if the company goes bankrupt. But I've never heard of anyone setting up a company in this way and it would seem to be an incredibly foolish thing to do.

share|improve this answer

answered Oct 14 at 2:10

David SchwartzDavid Schwartz

4,74822 gold badges1717 silver badges2424 bronze badges

• 
  
  
  

  
  2
  

  
  
  
  
  
  

  
  
  Well, I guess a ponzi scheme does this, where you pay the company to "work" for them... but obviously that's pretty bad and you don't want to do this.
  
  – Nelson
  Oct 14 at 2:16
  

  
  
  
  


• 
  
  
  

  
  1
  

  
  
  
  
  
  

  
  
  Nelson: In that case you lose your investment. A company scheme where you can lose more than your investment is rare. (However, If a limited company gives a director a loan instead of salary, which can be done to save/avoid taxes, that loan has to be repaid if the company goes bankrupt).
  
  – gnasher729
  Oct 14 at 9:41
  
  

  
  
  
  

add a comment
 | 

0

It's possible to setup an entity such that employees with equity can wind up with financial obligations if the company goes bankrupt. But I've never heard of anyone setting up a company in this way and it would seem to be an incredibly foolish thing to do.

share|improve this answer

answered Oct 14 at 2:10

David SchwartzDavid Schwartz

4,74822 gold badges1717 silver badges2424 bronze badges

• 
  
  
  

  
  2
  

  
  
  
  
  
  

  
  
  Well, I guess a ponzi scheme does this, where you pay the company to "work" for them... but obviously that's pretty bad and you don't want to do this.
  
  – Nelson
  Oct 14 at 2:16
  

  
  
  
  


• 
  
  
  

  
  1
  

  
  
  
  
  
  

  
  
  Nelson: In that case you lose your investment. A company scheme where you can lose more than your investment is rare. (However, If a limited company gives a director a loan instead of salary, which can be done to save/avoid taxes, that loan has to be repaid if the company goes bankrupt).
  
  – gnasher729
  Oct 14 at 9:41
  
  

  
  
  
  

add a comment
 | 

It's possible to setup an entity such that employees with equity can wind up with financial obligations if the company goes bankrupt. But I've never heard of anyone setting up a company in this way and it would seem to be an incredibly foolish thing to do.

share|improve this answer

answered Oct 14 at 2:10

David SchwartzDavid Schwartz

4,74822 gold badges1717 silver badges2424 bronze badges

share|improve this answer

answered Oct 14 at 2:10

David SchwartzDavid Schwartz

4,74822 gold badges1717 silver badges2424 bronze badges

answered Oct 14 at 2:10

David SchwartzDavid Schwartz

4,74822 gold badges1717 silver badges2424 bronze badges

answered Oct 14 at 2:10

David SchwartzDavid Schwartz

4,74822 gold badges1717 silver badges2424 bronze badges