What shareholding to ask for
Discussion
I’ll try and make this brief.
I have the opportunity to assume the MD role of a non-bank lender, focusing on short term development / bridging loans.
The company is owned 70/30 by the founder and its main investor.
As part of the agreement, I will gain a shareholding / directorship of the company, predicated on my performance and subsequent profitability. I have no qualms about that, but I wanted to ask the wider group the best ‘strategy’ or opening gambit. My first thoughts are:
I would like a 30% overall shareholding, comprised of 5% at the end of year 1, an additional 10% at year 2 end, and another 15% after 3 years.
Package etc is taken care of; I can see the opportunity and am confident I will succeed.
Does the above sound reasonable?
Also; any brokers or developers out there who want to guide some enquiries my way - feel free!
Matt
I have the opportunity to assume the MD role of a non-bank lender, focusing on short term development / bridging loans.
The company is owned 70/30 by the founder and its main investor.
As part of the agreement, I will gain a shareholding / directorship of the company, predicated on my performance and subsequent profitability. I have no qualms about that, but I wanted to ask the wider group the best ‘strategy’ or opening gambit. My first thoughts are:
I would like a 30% overall shareholding, comprised of 5% at the end of year 1, an additional 10% at year 2 end, and another 15% after 3 years.
Package etc is taken care of; I can see the opportunity and am confident I will succeed.
Does the above sound reasonable?
Also; any brokers or developers out there who want to guide some enquiries my way - feel free!
Matt
Are the shares tradable?
If not the percentage means nothing compared to what’s in the shareholder agreement. You have to be as happy with what’s in that as your more traditional employment package.
There are lots of things to consider but a big one is what happens if another of the shareholders wants out. Who gets first refusal and at what price. Another is how are dividends structured and paid?
Go in with your eyes wide open is the best advice I can give.
If not the percentage means nothing compared to what’s in the shareholder agreement. You have to be as happy with what’s in that as your more traditional employment package.
There are lots of things to consider but a big one is what happens if another of the shareholders wants out. Who gets first refusal and at what price. Another is how are dividends structured and paid?
Go in with your eyes wide open is the best advice I can give.
Depends what the business is worth today.
Under a PE deal a CEO might get 20% of the sweet equity for himself and the management team - taking a max of half (10%) for himself.
Sweet equity is the net gain in equity (increase in value) less any interest the PE house applies.
In my typical example I am talking about a business that might plan to create a £100+M of equity over 4 years - so if it all works out (IF) said CEO might make £10m over 4 years.
Needless to say for a much smaller business the percentages could be higher - however the principle of added value tends to apply I.e. the equity excludes any intrinsic value that was there when the senior manger joined - only a share in new value created.
Under a PE deal a CEO might get 20% of the sweet equity for himself and the management team - taking a max of half (10%) for himself.
Sweet equity is the net gain in equity (increase in value) less any interest the PE house applies.
In my typical example I am talking about a business that might plan to create a £100+M of equity over 4 years - so if it all works out (IF) said CEO might make £10m over 4 years.
Needless to say for a much smaller business the percentages could be higher - however the principle of added value tends to apply I.e. the equity excludes any intrinsic value that was there when the senior manger joined - only a share in new value created.
Wilmslowboy said:
Depends what the business is worth today.
Under a PE deal a CEO might get 20% of the sweet equity for himself and the management team - taking a max of half (10%) for himself.
Sweet equity is the net gain in equity (increase in value) less any interest the PE house applies.
In my typical example I am talking about a business that might plan to create a £100+M of equity over 4 years - so if it all works out (IF) said CEO might make £10m over 4 years.
Needless to say for a much smaller business the percentages could be higher - however the principle of added value tends to apply I.e. the equity excludes any intrinsic value that was there when the senior manger joined - only a share in new value created.
True, but here it doesn’t sound like a PE incentive package, it’s the OP being hired in to the business to run it. Under a PE deal a CEO might get 20% of the sweet equity for himself and the management team - taking a max of half (10%) for himself.
Sweet equity is the net gain in equity (increase in value) less any interest the PE house applies.
In my typical example I am talking about a business that might plan to create a £100+M of equity over 4 years - so if it all works out (IF) said CEO might make £10m over 4 years.
Needless to say for a much smaller business the percentages could be higher - however the principle of added value tends to apply I.e. the equity excludes any intrinsic value that was there when the senior manger joined - only a share in new value created.
Unless going into it with serious credentials and adding serious value, the OP’s proposal for 30% of the whole for simply remaining in post, and taking no financial risk, would be extremely ambitious/generous (depending on which side of the table you sit). To put it into context, in asking for that what OP is after he is suggesting that his contribution is worth approx 40% of the founders and the same as the guy who put up the money.
The bit in bold is important… but in that sector the the business model involved is important as the growth of lending businesses is highly reliant on the availability of liquidity. I would also expect the incentives to be more balanced than just looking at value.
ETA: how is the package sorted if this important element is yet to be agreed?
Edited by LooneyTunes on Sunday 12th December 21:37
Thanks, chaps, for your replies.
A few morsels:
Founder of the company is looking to retire but remain a board member.
They currently have a loanbook which provides c. £50k / month in interest income. However, without fresh deals coming on board this will diminish over the next 12 months.
I am still at negotiating stage - happy with the base pay (my personal overheads are low) and this could be my perfect time to sit in the ‘big seat’.
Part of their attraction to me is that I can potentially add institutional funding lines to bolster their lending capacity.
All in all, I think it’s a decent opportunity but wanted to run it past the great and the good here. If 30% is too cheeky (and I’m not unaware of the work involved) then I’d rather have a steer on it.
Best,
Matt
A few morsels:
Founder of the company is looking to retire but remain a board member.
They currently have a loanbook which provides c. £50k / month in interest income. However, without fresh deals coming on board this will diminish over the next 12 months.
I am still at negotiating stage - happy with the base pay (my personal overheads are low) and this could be my perfect time to sit in the ‘big seat’.
Part of their attraction to me is that I can potentially add institutional funding lines to bolster their lending capacity.
All in all, I think it’s a decent opportunity but wanted to run it past the great and the good here. If 30% is too cheeky (and I’m not unaware of the work involved) then I’d rather have a steer on it.
Best,
Matt
mattnovak said:
Founder of the company is looking to retire but remain a board member.
They currently have a loanbook which provides c. £50k / month in interest income. However, without fresh deals coming on board this will diminish over the next 12 months.
I am still at negotiating stage - happy with the base pay (my personal overheads are low) and this could be my perfect time to sit in the ‘big seat’.
Part of their attraction to me is that I can potentially add institutional funding lines to bolster their lending capacity.
All in all, I think it’s a decent opportunity but wanted to run it past the great and the good here. If 30% is too cheeky (and I’m not unaware of the work involved) then I’d rather have a steer on it.
Against that backdrop, given you’ve got a mountain to climb from a £50k/mth interest income business to one that can handle institutional money, 30% probably isn’t that cheeky. It’s basically a startup but with the benefit (or quite possibly the drag) of historic activities. They currently have a loanbook which provides c. £50k / month in interest income. However, without fresh deals coming on board this will diminish over the next 12 months.
I am still at negotiating stage - happy with the base pay (my personal overheads are low) and this could be my perfect time to sit in the ‘big seat’.
Part of their attraction to me is that I can potentially add institutional funding lines to bolster their lending capacity.
All in all, I think it’s a decent opportunity but wanted to run it past the great and the good here. If 30% is too cheeky (and I’m not unaware of the work involved) then I’d rather have a steer on it.
If it were me, I wouldn’t be saying that “I want x% here, y% there, etc”. Couch it in terms of an incentive programme that sees new shares issued and lets you earn equity as part of your package. The net effect can be the same (existing shareholders diluted) but less contentious “taking” from them. In any event, if they’re smart and understand what the proposed direction implies, they won’t agree fixed percentages to be issued years down the line.
Then think of vesting periods. If these guys have any sense they’re not going to agree to anything that sees you end up with a big stake (and then potentially walk) after a short period of time. Deferred compensation models are common in financial services/startups as they want the golden handcuffs to be heavy if you’re any good. The thought of someone hoovering up a load of equity and then vanishing doesn’t really work for a lot of founders either… you’ll get more respect and traction for acknowledging this up front and expecting (or even proposing) that each tranche vests over a 3-5 year period.
If you do go down the route of performance triggers then also think about the factors, or than your own personal performance, that could impact success. For example, if you’re going to drive the business from what sounds like a single/small number of private lender(s) to institutional scale the business will change significantly as a result of your effort (assume you’ve thought about where the funding to,do this comes from). Maybe also consider if/how you can agree a buyout formula upfront to get rid of the others later (before it becomes too valuable).
I’m still not entirely sure how you can agree base salary without having the equity side of things in play too. Would have expected the conversation to go more along the lines of “to grow from this to that requires a, b, and c but means that enterprise value has increased from x to y - my share of (y-x) needs to be z, so let’s discuss how we split this between cash and non-cash compensation”. If it did and the cash element is all they can afford from current cash flows then great, but if it’s not then I see a risk that with the cash side agreed they won’t be expecting a request at the level you have in mind (especially if they perceive the cash element to be at market rate). May be obvious but lay out the rationale before the numbers…
One last thing: think about the demands the founder/chair is going to make (in terms of cash/control) and whether he’s going to be credible with the sort of money you want to bring in or a liability. The last thing you want is someone who is dreaming much smaller than you, out of their comfort zone, blocking the moves you need to make, or somehow impeding your efforts to grow. Conversely, it can be useful to have some “grey hair” around if they add value instead of getting in the way.
Hope this helps.
Wilmslowboy said:
unless you plan to make the business much bigger and create value.
I think that is the plan given he's talking about bringing in institutional money (at £50k/mth interest income, the current loan book is likely to be single digit £millions, which isn't really worth an institutional investor getting out of bed for so it would need to grow).You have already received some excellent advice OP.
In addition it would be worthwhile considering this from the founder's position.
He/she may have more than one potential candidate in mind to help them achieve their growth ambitions over various timeframes. Each of whom will hopefully bring value, plus potential headaches.
They need to see a decent multiple on your total cost over the time that it will take for you to achieve what you say you will.
In addition it would be worthwhile considering this from the founder's position.
He/she may have more than one potential candidate in mind to help them achieve their growth ambitions over various timeframes. Each of whom will hopefully bring value, plus potential headaches.
They need to see a decent multiple on your total cost over the time that it will take for you to achieve what you say you will.
“Founder” means nothing in the context of this business. Some bloke (investor) has excess capital and wants to lend it. “Founder” finds a few people that want to borrow short term and introduces the two. It’s not really a business at the moment.
I’d guess they’ve only lent £5m and a handful of short term clients. You could call yourself Managing Director but the reality is your job will consist of primarily finding solvent people with good security that want to borrow money short term.
I’d guess they’ve only lent £5m and a handful of short term clients. You could call yourself Managing Director but the reality is your job will consist of primarily finding solvent people with good security that want to borrow money short term.
mattnovak said:
They currently have a loanbook which provides c. £50k / month in interest income. However, without fresh deals coming on board this will diminish over the next 12 months.
Do the current shareholders have £5-10 mm of their own capital locked up in the company to fund the loan book, or do they have some kind of external funding / asset management agreement? This obviously has significant bearing on what you are really asking for when you ask for a shareholding in the company. If it's a capital light business model you should expect a much higher % share than if there's a lot of equity on the balance sheet.Earning yourself into 5-10% over 5 years doesn't sound unreasonable, but you should expect to be diluted if the business growth requires a lot of additional equity funding. You could propose to coinvest to acquire an additional shareholding to show your alignment - in PE we would typically require a CEO to chip in £500k or so alongside us at the beginning of a deal.
Hope Mrs N is doing well Matt.
1) the CEO will likely already be familiar with the business and/or have some sector credentials/experience;
2) the total money going in would dwarf the £500k of the CEO;
3) there will almost certainly be a generous LTIP in place; and
4) professional investors will have scrubbed down the opportunity and deemed it investable.
None of those seem to apply here, and the business doesn’t sound PE-ready. Could be wrong but I’d view any inward investment by the OP as being more akin to seed/pre-series round, where £500k would represent a very sizeable commitment (to the extent that the OP would probably also be considering the merits of starting afresh). It’ll almost certainly need further investment at some point but, if I were the OP, I’m not sure I’d be writing a cheque too early.
NickCQ said:
You could propose to coinvest to acquire an additional shareholding to show your alignment - in PE we would typically require a CEO to chip in £500k or so alongside us at the beginning of a deal.
True, but in a PE transaction environment:1) the CEO will likely already be familiar with the business and/or have some sector credentials/experience;
2) the total money going in would dwarf the £500k of the CEO;
3) there will almost certainly be a generous LTIP in place; and
4) professional investors will have scrubbed down the opportunity and deemed it investable.
None of those seem to apply here, and the business doesn’t sound PE-ready. Could be wrong but I’d view any inward investment by the OP as being more akin to seed/pre-series round, where £500k would represent a very sizeable commitment (to the extent that the OP would probably also be considering the merits of starting afresh). It’ll almost certainly need further investment at some point but, if I were the OP, I’m not sure I’d be writing a cheque too early.
LooneyTunes said:
True, but in a PE transaction environment:
1) the CEO will likely already be familiar with the business and/or have some sector credentials/experience;
2) the total money going in would dwarf the £500k of the CEO;
3) there will almost certainly be a generous LTIP in place; and
4) professional investors will have scrubbed down the opportunity and deemed it investable.
£500k might be the wrong number but if our OP is going to be CEO with oversight over loan underwriting he should "eat his own cooking", so to speak. 1) the CEO will likely already be familiar with the business and/or have some sector credentials/experience;
2) the total money going in would dwarf the £500k of the CEO;
3) there will almost certainly be a generous LTIP in place; and
4) professional investors will have scrubbed down the opportunity and deemed it investable.
If you wanted to get fancy you could segregate the portfolio into frontbook/backbook so that he only funds future receivables originated under his leadership of the business. This could take place at 1x book value so there are no arguments about what the "franchise value" of the existing business is (if there is any at all).
If I were the founder / investor I would not want a CEO with no capital at risk and pure salary economics + long-term upside.
Have they asked you to write a Business Plan?
Any discussions on what your deliverables might be? I would have thought asking them about an LTIP and sounding them out first rather than wading in with 30%.
I owned a sizeable business and wouldn't have looked too favourably on an unproven new recruit wanting quite so much.
Perhaps they might offer you options with a hurdle based on the value today - growth shares effectively.
Any discussions on what your deliverables might be? I would have thought asking them about an LTIP and sounding them out first rather than wading in with 30%.
I owned a sizeable business and wouldn't have looked too favourably on an unproven new recruit wanting quite so much.
Perhaps they might offer you options with a hurdle based on the value today - growth shares effectively.
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