I misunderstood the idea. So ... it's like loan with your promised-equity as collateral, but you don't have to pay it back if the startup fails (or they have an small exit where you get no money).
If the start-up does not have cash reserves / cash generation to pay salaries, then the promised-equity has a very low value, so I'd expect the fee to be huge.
Let's suppose that they give $100. If we assume that half of the startup fails, if they want to break even you must return $200. If we assume that 90% of the startup fails or the employees don't get money, if they want to break even you must return $1000.
> If the start-up does not have cash reserves / cash generation to pay salaries, then the promised-equity has a very low value, so I'd expect the fee to be huge.
I agree.
In some situations where you are stuck working for the startup and need cash now out of illiquid startup equity / if you want to smooth out large risk that startup does not produce a profitable exit for you, then maybe this makes sense.
But, if you have the option to work somewhere else (a mature profitable company with enough scale so that your role is valuable) and getting paid 100% cash, it is quite likely that would be more profitable than working for the startup.
It's more like, IF you're in the situation where you have equity and don't want to wait for / be dependent on an exit (and whether the exit is big enough), this offers a solution.
Fees aren't as high as what gus_massa is figuring, because we don't finance early stage startups.
Plus in a lot of cases we enable long-term capital gains tax rates. (If you exercise your stock options early and end up owning the shares for 12+ months, the money you make is taxed at a lower rate – long term cap gains.)
If the start-up does not have cash reserves / cash generation to pay salaries, then the promised-equity has a very low value, so I'd expect the fee to be huge.
Let's suppose that they give $100. If we assume that half of the startup fails, if they want to break even you must return $200. If we assume that 90% of the startup fails or the employees don't get money, if they want to break even you must return $1000.