Shareholder demanding compensation
Discussion
Bit of background: Few years ago friend persuades me to give up work and start my own IT company. His company gives me a 2 year support contract to help me get established. In exchange for the contract I give him 40% shares in the new company. During the next few years company was ok, gentle growth but then major fallout with staff the result being company is now back down to just myself. Shareholder is now demanding "his" original investment back and his company is invoicing me for "compensation" payments. Morally, I had wanted to give him this back and have paid some but there isn't the income to sustain this. Given that I have no contract to supply goods or services with his company how do I stand with these invoices and his threat of legal action?
philmorton said:
Bit of background: Few years ago friend persuades me to give up work and start my own IT company. His company gives me a 2 year support contract to help me get established. In exchange for the contract I give him 40% shares in the new company. During the next few years company was ok, gentle growth but then major fallout with staff the result being company is now back down to just myself. Shareholder is now demanding "his" original investment back and his company is invoicing me for "compensation" payments. Morally, I had wanted to give him this back and have paid some but there isn't the income to sustain this. Given that I have no contract to supply goods or services with his company how do I stand with these invoices and his threat of legal action?
They're scaremongering.He invested in a business. The business didn't succeed. His investment did not pay back. Life's like that. If he wanted to have input into running the business to protect his investment, then he should have negotiated that at the time.
You could arrange to sell his 40% back to him - at whatever price is mutually agreeable. Otherwise, while the company is still extant, then he still owns 40% of it.
.philmorton said:
Bit of background: Few years ago friend persuades me to give up work and start my own IT company. His company gives me a 2 year support contract to help me get established. In exchange for the contract I give him 40% shares in the new company. During the next few years company was ok, gentle growth but then major fallout with staff the result being company is now back down to just myself. Shareholder is now demanding "his" original investment back and his company is invoicing me for "compensation" payments. Morally, I had wanted to give him this back and have paid some but there isn't the income to sustain this. Given that I have no contract to supply goods or services with his company how do I stand with these invoices and his threat of legal action?
Comedy.What legal action?
He still owns 40%.
(Unless you stole money from the company or deliberately ran it into the ground for some reason.)
You have no moral obligation to him.
He took a gamble and lost.
I do hope for any payments you ARE making to him, you are making it completely clear how much equity he is giving up for them?
Why not simply close your business down?
re start that way you have 100% ownership
If existing business has any assets , and your feeling generous give him his fair share.
Otherwise hes got 40% of your earnings as an individual for the rest of your life.
If he was willing to pump additional investment into you such that you become a business again then i would stick it out.
Otherwise restart without him on your back.
re start that way you have 100% ownership
If existing business has any assets , and your feeling generous give him his fair share.
Otherwise hes got 40% of your earnings as an individual for the rest of your life.
If he was willing to pump additional investment into you such that you become a business again then i would stick it out.
Otherwise restart without him on your back.
By the way, when you say "his" company gave you a two year contract, is it actually "his" company - ie he is a majority shareholder - or is it a company that employs him/in which he has a minority interest?
If the latter, then he is potentially in quite hot water unless he declared his interest in your business.
Also, apart from awarding your company a contract, what investment did he actually make?
If the latter, then he is potentially in quite hot water unless he declared his interest in your business.
Also, apart from awarding your company a contract, what investment did he actually make?
mikebradford said:
Otherwise hes got 40% of your earnings as an individual for the rest of your life.
40% of the dividends surely, OPs salary is an operational cost?but yes, what is is asking for compensation for? Not fulfilling the contract or loss of return on his investment? What contract? Was there actually a contract that said you would get business in return a share in the company. If so, what does that say?
What does the letter asking for compensation actually say? Any explanation as to why he/they feel they deserve to be compensated?
Lastly, was is the friend actually asking for when he wants 40% back? I assume that he wants you to buy his shares but how does he value them and why does he think you have any obligation to buy him out?
Finally, as said, don't pay a penny until you are sure you know what it is for and it is reasonable. But don't ignore it either.......
(imho anyway....)
philmorton said:
Bit of background: Few years ago friend persuades me to give up work and start my own IT company. His company gives me a 2 year support contract to help me get established. In exchange for the contract I give him 40% shares in the new company. During the next few years company was ok, gentle growth but then major fallout with staff the result being company is now back down to just myself. Shareholder is now demanding "his" original investment back and his company is invoicing me for "compensation" payments. Morally, I had wanted to give him this back and have paid some but there isn't the income to sustain this. Given that I have no contract to supply goods or services with his company how do I stand with these invoices and his threat of legal action?
You give up your job...He gives you a £100k a year support contract... it should cost him £200k, but he is doing you a favour, in exchange for the contract he takes 40% of your shares.
In the the next 2 years he gets support from you and 40% of the £100k he gives you in payment (minus company expenses and salaries) back.
He then complains when it all goes tits up?
Ok...
What was his investment? giving you a support contract is not investment, investment is giving you £100k to buy equipment to help set up.
Now he wants it back and is invoicing the support company form compensation.
He can take a leap of a short pier for the investment... but the compensation could be a real issue if you signed up to a contract with him to provide cheap support for X years with SLA of Y and you fail this, you pay Z.
What does the contract say?
He is not a friend and has really done one over on you by the sounds of it.
KevinCamaroSS said:
walm said:
Why would you do that?
Prospects sound far worse now then when he invested originally.
OP is under no obligation to offer him more than they are worth.
On the basis he did not actually pay for them in the first place (OP said 'gave').Prospects sound far worse now then when he invested originally.
OP is under no obligation to offer him more than they are worth.
Sorry, being slow.
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