Joining existing company - increasing share ownership

[MagicalTrevor]

Hi,

I'm considering joining an existing company as a Director, in the process bringing a client relationship and the prospect of some decent line of revenue. However, Day 1 will just be the relationship and potential.

We (all directors involved) agree that if this particular piece of business goes well then it has potential to account for up to 50% of the total revenue for the company however they won't hand over that sort of percentage of ownership on day 1 to me, understandably.

So, before I speak to lawyer for legal advice, I was hoping to seek a pointer/advice from the PH masses as to whether it's possible to join the company with a 5% (for example) stake in the company with a view for this to change to a higher percentage if my business relationship meets agreed KPIs?

To give an example using made up figures.
Company A is worth £100k with 3 directors (40/30/30% split)
I join company A and I'm given 5% shares on day 1.
At the end of year 1, I've brought in £50k of business so my share grows to 15%
Year 2, the business has grown to £100k so I now have 25%. The split is now 35/25/20/20.

They have existing R&D business that has potential to be worth a lot of money but, like the business I'm bringing, is worth nothing buy blood, sweat and tears. They're naturally concerned that my contribution could fail but I could get a percentage of the proceeds, and vice versa, my business could earn £1m.

Is that possible? Can we protect our contributions? What would I read up on (I'm stuck for google terms to search)

Thanks

[anonymous-user]

Someone posted a thread about Employee Management Incentive Schemes earlier.

An EMi could well suit this scenario.

You need to be careful to avoid a tax charge of you get awarded shares so it's important to take some proper advice as it complicated easily.

[anonymous-user]

Linking equity in an existing business to the potential of bringing a single client onboard sounds like a complicated solution to a simple problem.

I would be inclined to agree a salary which reflects your value to the business excluding this new client. And then agree a bonus structure with a sliding scale of reward depending upon the future performance of this client.

[anonymous-user]

EddieSteadyGo said:

Linking equity in an existing business to the potential of bringing a single client onboard sounds like a complicated solution to a simple problem.

I would be inclined to agree a salary which reflects your value to the business excluding this new client. And then agree a bonus structure with a sliding scale of reward depending upon the future performance of this client.

This doesn't recognise the capital value being built up.

[anonymous-user]

desolate said:

This doesn't recognise the capital value being built up.

True, but clients come and go. If this potential new client moves to another supplier for some reason, does the OP give us his equity?

As an aside, in my experience (although I'm sure this isn't the case with the OP) people who are moving to a job and are offering to bring with them a large client tend to over-estimate their influence with a client.

[anonymous-user]

EddieSteadyGo said:

True, but clients come and go. If this potential new client moves to another supplier for some reason, does the OP give us his equity?

As an aside, in my experience (although I'm sure this isn't the case with the OP) people who are moving to a job and are offering to bring with them a large client tend to over-estimate their influence with a client.

In the answer to the first question then it's possible to set up a provision that shares are lost if certain KPIs aren't hit. Eg if the employee ceases to be an employee for performance issues.

And in response to the second paragraph I agree - have had failures far outnumbering the successes.

[anonymous-user]

desolate said:

In the answer to the first question then it's possible to set up a provision that shares are lost if certain KPIs aren't hit. Eg if the employee ceases to be an employee for performance issues.

Interesting point.

[anonymous-user]

EddieSteadyGo said:

Interesting point.

Properly set up an EMI scheme or similar is a pretty flexible tool but for most small businesses it's a sledgehammer to crack a nut.

[MagicalTrevor]

Thanks so far. It's a tricky one. FWIW, I don't wish to be an employee of the company, it's Director (this is PH after all!) or nothing.

We did consider setting up a new company for this venture but we suspect the client will baulk at a '0 year' company and would prefer the '3 year' (as it is in this case) company.

Maybe some sort of shareholder agreement + 'B shares'?

[anonymous-user]

MagicalTrevor said:

Thanks so far. It's a tricky one. FWIW, I don't wish to be an employee of the company, it's Director (this is PH after all!) or nothing.

We did consider setting up a new company for this venture but we suspect the client will baulk at a '0 year' company and would prefer the '3 year' (as it is in this case) company.

Maybe some sort of shareholder agreement + 'B shares'?

As a director you will be an employee of the company.
If you are given shares when you start work then you will be liable to pay tax on them on your next tax return.
The shareholder agreement can be written in such a way as you lose your shares if you cease to be an employee. Also you shares can be rendered worthless by the majority.
Being a minority shareholder without a strong shareholder agreement can be a total waste of time really.


However having said all that feint heart never won fair maiden so if it's feels right I'd go for it.

[maffski]

desolate said:

If you are given shares when you start work then you will be liable to pay tax on them on your next tax return.

Normally in a small business the shares have a fixed low value so this shouldn't be a worry? It's more a concern for listed companies where shares have a realistic floating value.

[anonymous-user]

maffski said:

Normally in a small business the shares have a fixed low value so this shouldn't be a worry? It's more a concern for listed companies where shares have a realistic floating value.

Well it depends.

If the shares are going to generate say 20k a year in dividends then they will have a value.

Even if they are only worth a few 10s of K then it could generate a small tax liability that is big enough to be a headache if you aren't earning that much.


But yes, in general it should be possible to prove the shares are worthless. Which is because as a minority shareholder in a small business the shares can be made worthless very easily.

[MagicalTrevor]

Thanks again for the responses, I am reading them. I think this sounds like a trickier problem that I anticipated. I'll be certain to get legal advice on this.

[Europa1]

OP, do you want shares for income or capital growth?

If the former, what's the company's dividend policy?

If the latter, what's the exit strategy?

[Jockman]

desolate said:

As a director you will be an employee of the company.

You sure?

[anonymous-user]

Jockman said:

desolate said:

As a director you will be an employee of the company.

You sure?

I suppose in the strictest sense you are an officer not an employee.
However, given what the OP has said he will be bringing a client within him unless I have read it completely incorrectly what he means is he will only move if he is a shareholding director rather than just an employee,

Apologies if I have read it incorrectly.