Responsibilites/risks of being a Director
Discussion
Hello all,
I've got the opportunity to invest in a local small business to help with an expansion (cafe/restaurant/bike shop). It's not a lot, only a couple of percent I should think, but part of it apparently means I'll become a director rather than a minority shareholder.
I've never done anything like this so I was wondering what to bear in mind. If the business goes tits up I don't want to be on the hook for thousands for the sake of a small investment - about £1k, but I'll be putting in time and probably more money in the future.
I'm not trying to make a living out of it, as it's a local business I like it's as much being able to say "I own a bit of that" as it is the financial reward.
Thanks
I've got the opportunity to invest in a local small business to help with an expansion (cafe/restaurant/bike shop). It's not a lot, only a couple of percent I should think, but part of it apparently means I'll become a director rather than a minority shareholder.
I've never done anything like this so I was wondering what to bear in mind. If the business goes tits up I don't want to be on the hook for thousands for the sake of a small investment - about £1k, but I'll be putting in time and probably more money in the future.
I'm not trying to make a living out of it, as it's a local business I like it's as much being able to say "I own a bit of that" as it is the financial reward.
Thanks
These are the kind of questions I need to be asking, so thank you. As far as I know it's a cafe owned by one person. She's on about expanding to include a shop with the idea being get a deposit + loan to fund the expansion/stock, the deposit coming from a handful of people (of whom I would be one). You percentage of the deposit dictate your percentage of the profits.
One thing I'm certain to want to know is if it all goes tits up, I don't want to be on the hook for paying off a loan. To be fair, if the shop never sells anything, the cafe still makes enough to cover the debt.
One thing I'm certain to want to know is if it all goes tits up, I don't want to be on the hook for paying off a loan. To be fair, if the shop never sells anything, the cafe still makes enough to cover the debt.
Sorry, but all of that is about as clear as mud.
If you are a director, it would have to be a company, but you need to find out.
If it is a company, then you will need a shareholders agreement.
You mention that you will be a director and not a shareholder, but it sounds like you will be both.
To be honest, if you only end up with 2%, i can't see how it is worth the bother?
You mention that you want to invest because you want to own a bit of it, but I've never heard of anyone investing in a company for anything other than financial gain, unless it's a 'not for profit' organisation, or charity?
The only thing that should be at risk is your initial investment, unless you sign any personal guarantees.
If you are a director, it would have to be a company, but you need to find out.
If it is a company, then you will need a shareholders agreement.
You mention that you will be a director and not a shareholder, but it sounds like you will be both.
To be honest, if you only end up with 2%, i can't see how it is worth the bother?
You mention that you want to invest because you want to own a bit of it, but I've never heard of anyone investing in a company for anything other than financial gain, unless it's a 'not for profit' organisation, or charity?
The only thing that should be at risk is your initial investment, unless you sign any personal guarantees.
I'll try and keep it simple...
You need to first establish if the business is a Limited company. This means that the liability of the owners and shareholders is limited to the investment they made. So in the worst case scenario, you could end up loosing your £1k regardless of any debt the business has incurred.
You next need to establish the conditions of the loan to the business. This may require Director’s guarantees which means that regardless of the Limited status of the company, if it defaults on the loan, the lender will seek payment from the Directors proportional to their shareholding. So, if your £1k gets you 10% of the company and it defaults on a £100k loan, you will be required to pay £10k to the lender.
As a director, you are jointly and severally responsible for ensuring that the company is being run properly. That means if another director does something wrong, you and the other directors are all liable as you should all be making sure it didn't happen. This could be not filing a VAT return properly, fudging the accounts, not sticking to any relevant legal requirement and so on. Ignorance is not a defence and you would be proportionally liable for any fine issued to the company. You need to satisfy yourself that the owners and other Directors are solid.
The owner may at any time ask shareholders to invest more into the business by buying more shares that they issue. At that point, you may not wish to or be able to. Your shareholding will thus decrease as a result.
As others have said, investing in a company doesn't automatically give you Director status. The term 'Director' normally relates someone who has been appointed as such and will thus have a job description or similar which sets out their requirements in terms of operations. It will also set out your voting rights on the board – which at the level you’re looking at will be pitiful, unless provision for equal voting rights has been made which is unlikely. This means that if a decision on the company’s direction is brought to the board for approval and you don’t agree with it, tough (unless others have a similar view to you).
Lets say she takes out a £40k loan that requires a £4k deposit that she gets from four investors each putting in £1k – 25% each. On this basis they wold each be entitled to 25% of the profits. What about her? She’s taking 90% of the risk but getting none of the reward – not going to happen.
I think that what you’ll find is something like this.
On the same basis, she will be taking a £36k risk (90% of the total). The other investors are taking 2.5% of the risk (10% in total). Thus your profit entitlement is 2.5%. So in order for you to make back your £1k, the company would have to make a £40k profit. And that’s just to get your money back. And profit is calculated after the loan repayments have been taken into account. For you to double your money, it would need to make an £80k profit. You thus need to look at the accounts and business plan to satisfy yourself that this is feasible within a reasonable time frame (I would suggest 1 to 2 years to secure your original investment and 2 to 3 years to double it.
I could go on….but:
You need to first establish if the business is a Limited company. This means that the liability of the owners and shareholders is limited to the investment they made. So in the worst case scenario, you could end up loosing your £1k regardless of any debt the business has incurred.
You next need to establish the conditions of the loan to the business. This may require Director’s guarantees which means that regardless of the Limited status of the company, if it defaults on the loan, the lender will seek payment from the Directors proportional to their shareholding. So, if your £1k gets you 10% of the company and it defaults on a £100k loan, you will be required to pay £10k to the lender.
As a director, you are jointly and severally responsible for ensuring that the company is being run properly. That means if another director does something wrong, you and the other directors are all liable as you should all be making sure it didn't happen. This could be not filing a VAT return properly, fudging the accounts, not sticking to any relevant legal requirement and so on. Ignorance is not a defence and you would be proportionally liable for any fine issued to the company. You need to satisfy yourself that the owners and other Directors are solid.
The owner may at any time ask shareholders to invest more into the business by buying more shares that they issue. At that point, you may not wish to or be able to. Your shareholding will thus decrease as a result.
As others have said, investing in a company doesn't automatically give you Director status. The term 'Director' normally relates someone who has been appointed as such and will thus have a job description or similar which sets out their requirements in terms of operations. It will also set out your voting rights on the board – which at the level you’re looking at will be pitiful, unless provision for equal voting rights has been made which is unlikely. This means that if a decision on the company’s direction is brought to the board for approval and you don’t agree with it, tough (unless others have a similar view to you).
crofty1984 said:
You percentage of the deposit dictate your percentage of the profits
Highly unlikely that this is how it will work. Lets say she takes out a £40k loan that requires a £4k deposit that she gets from four investors each putting in £1k – 25% each. On this basis they wold each be entitled to 25% of the profits. What about her? She’s taking 90% of the risk but getting none of the reward – not going to happen.
I think that what you’ll find is something like this.
On the same basis, she will be taking a £36k risk (90% of the total). The other investors are taking 2.5% of the risk (10% in total). Thus your profit entitlement is 2.5%. So in order for you to make back your £1k, the company would have to make a £40k profit. And that’s just to get your money back. And profit is calculated after the loan repayments have been taken into account. For you to double your money, it would need to make an £80k profit. You thus need to look at the accounts and business plan to satisfy yourself that this is feasible within a reasonable time frame (I would suggest 1 to 2 years to secure your original investment and 2 to 3 years to double it.
I could go on….but:
cholo said:
To be honest, if you only end up with 2%, i can't see how it is worth the bother?
Unless there is some plan to expand into a national chain before spreading international, it’s highly unlikely that you would see any meaningful return and a high risk that you’d never see your £1k again. In the grand scheme of things £1k isn’t a lot and if you’ve nothing better to do with it, then it may be worth a punt but that’s all it will be so just go into with your eyes open and expectations low.Edited by StevieBee on Wednesday 8th January 14:35
Edited by StevieBee on Wednesday 8th January 14:36
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