Taking equity for your work while you're in bankruptcy or behind on debts

Founders take equity instead of salary all the time. If you're in bankruptcy or have creditors waiting, that equity may not be entirely yours.

Chapter 13

In Chapter 13, property and earnings you acquire during the case generally become part of the bankruptcy estate. Equity you receive for work during the plan can count. It may need to be disclosed, it may affect your plan payments, and some arrangements may need trustee or court approval.

Chapter 7

In Chapter 7, property you acquire after filing is usually yours, but equity tied to work done or promised before the filing may not be.

Creditors outside bankruptcy

A judgment creditor can often reach your interest in a company, usually through a charging order against distributions. Taking equity instead of salary can look like an effort to put earnings out of reach, which invites scrutiny. What a creditor can actually reach depends on your state and your company's structure.

Taxes still apply

Equity received for services is generally taxable income when it vests. If it vests over time, an 83(b) election filed within 30 days of the grant can change the timing. Owing tax on equity you can't sell is hard for anyone; harder when you're already behind.

Your cofounders care too

Investors and cofounders will want to know whether a trustee or creditor could claim part of your stake. Raise it early. How you split equity for work is already a hard conversation; see one partner does all the work.

What to do

Talk to your bankruptcy attorney before you sign anything that gives you equity. Then document the grant, the vesting, and what happens if you leave. A multi-member plan covers the company side; the bankruptcy questions belong with bankruptcy counsel.

This is general information, not legal advice for your situation. If you want an answer for your business, book a consultation.