Taking shares in a new business as part payment for services
Discussion
Hi all - bit of advice from those far more qualified, please! 
Situation:
There's an existing company, been around 5 years. Has had a lot of investment from it's main director of his own personal funds over this period to get it where it is. It's currently running at a small loss (but has had a ~£1m investment to date from him to get it to this point). 1 other full time employee besides him, but makes use of a reasonable amount of contract resource as required for work undertaken.
I was requested to provide them with a new offering they can take to market - something they've been planning and designing throughout this period - to change the company completely into something a LOT bigger and more profitable. I have done this for a cash amount, and have no issues with that. I'd pitch their odds at achieving a decent level of profit and growth now at 50:50, and largely down to the quality of the marketing and how quickly competition emerges (it's a new concept - and one with appeal).
They want to make use of my skills going forward - both for delivering specific things and consultancy. The current offer that we're both happily stands at a reduced day rate than I'd normally look at, plus 2.5% of the company. As I say, we're all happy with these numbers - I'll still get paid for the hours at a figure I'm willing to accept, and they'll get what they need at a price they're happy with (having burned through most of the capital investment available).
The plan is to set up a new company to launch this through for a number of reasons, with the shareholding coming from that, clients being invoiced from that, and so on and so on.
Question:
There's a good chance the shares'll be worthless. But should they become valuable, I want to make sure I've done anything necessary to make sure that value remains mine and there are no fall-outs! Is there anything anyone can think of that I need to make sure goes into the shareholders agreement, etc?
Obviously, having sight of the accounts. Preferably having sign-off on them (although at that level of shareholding, I can see that could be pushing it). Some clause for the value at which I could sell my shareholding back, and the points at which I could do this? Anything else? Worth pushing to be a director of the company for any reason?
Cheers, all - thanks via beers at BTaP/anywhere in Cheshire/London, naturally.
Situation:
There's an existing company, been around 5 years. Has had a lot of investment from it's main director of his own personal funds over this period to get it where it is. It's currently running at a small loss (but has had a ~£1m investment to date from him to get it to this point). 1 other full time employee besides him, but makes use of a reasonable amount of contract resource as required for work undertaken.
I was requested to provide them with a new offering they can take to market - something they've been planning and designing throughout this period - to change the company completely into something a LOT bigger and more profitable. I have done this for a cash amount, and have no issues with that. I'd pitch their odds at achieving a decent level of profit and growth now at 50:50, and largely down to the quality of the marketing and how quickly competition emerges (it's a new concept - and one with appeal).
They want to make use of my skills going forward - both for delivering specific things and consultancy. The current offer that we're both happily stands at a reduced day rate than I'd normally look at, plus 2.5% of the company. As I say, we're all happy with these numbers - I'll still get paid for the hours at a figure I'm willing to accept, and they'll get what they need at a price they're happy with (having burned through most of the capital investment available).
The plan is to set up a new company to launch this through for a number of reasons, with the shareholding coming from that, clients being invoiced from that, and so on and so on.
Question:
There's a good chance the shares'll be worthless. But should they become valuable, I want to make sure I've done anything necessary to make sure that value remains mine and there are no fall-outs! Is there anything anyone can think of that I need to make sure goes into the shareholders agreement, etc?
Obviously, having sight of the accounts. Preferably having sign-off on them (although at that level of shareholding, I can see that could be pushing it). Some clause for the value at which I could sell my shareholding back, and the points at which I could do this? Anything else? Worth pushing to be a director of the company for any reason?
Cheers, all - thanks via beers at BTaP/anywhere in Cheshire/London, naturally.
Hi,
I am pondering a very similar proposal, exchange some of my fees for small % each year, that will accrue year on year. Thoughts in my head:
Cheers, Big Ant
I am pondering a very similar proposal, exchange some of my fees for small % each year, that will accrue year on year. Thoughts in my head:
- risk of discontent, leading to Share Capital being added and my shareholding diluted.
- what if the company fails, is sued, etc - will the liabilities transfer to you ?
- if you leave more cash in the business, the value for all shareholders will be higher (i.e. P/E Ratio x Earnings = company value), and this 'leverage' should be reflected in your shareholding.
- can you stop or influence strategic decisions in the future (e.g. new products, markets, key hires, etc) that might impact your shareholding.
- what realistic options are there for exit;
- can you, or other shareholders, sell to a 3rd party, with limitation ?
- will dividends be paid annually, or profit distributed, and if yes, are you to participate ?
- can you influence appointment of new partners, shareholders, etc ?
Cheers, Big Ant
big ant said:
Hi,
I am pondering a very similar proposal, exchange some of my fees for small % each year, that will accrue year on year. Thoughts in my head:
Cheers, Big Ant
All very good questions which may take some time to agree. I am pondering a very similar proposal, exchange some of my fees for small % each year, that will accrue year on year. Thoughts in my head:
- risk of discontent, leading to Share Capital being added and my shareholding diluted.
- what if the company fails, is sued, etc - will the liabilities transfer to you ?
- if you leave more cash in the business, the value for all shareholders will be higher (i.e. P/E Ratio x Earnings = company value), and this 'leverage' should be reflected in your shareholding.
- can you stop or influence strategic decisions in the future (e.g. new products, markets, key hires, etc) that might impact your shareholding.
- what realistic options are there for exit;
- can you, or other shareholders, sell to a 3rd party, with limitation ?
- will dividends be paid annually, or profit distributed, and if yes, are you to participate ?
- can you influence appointment of new partners, shareholders, etc ?
Cheers, Big Ant
An alternative would be to licence the libraries or contributions for a % of the sale price. This is far more likely to give you a return in the shrt term than some shares.
I think a lot of the things you think you would reasonably want are unlikely to be agreed to by the majority shareholder...it's worth asking for but ultimately whilst you are taking risk by exchanging fees for shares you are also getting more upside. Instead of going in with a lengthy shopping list I would maybe go in with four or five points you want with say two or three of those being absolute must have's....if you get the other two then great but if not the other side of the equation doesn't feel like they have been held to ransom.
One thing that I would definitely want to know is who owns the IP/Patents if there are any ? It MUST be the company. There's a reason why the Dragon's always ask that question.
Things like dividends are very hard to nail down as you certainly don't want a situation where a company is forced to pay dividends that it can't afford. If anything I would want an agreement in a start up where dividends can't be paid for two or three years, ideally you want a company to invest in the business (which should ultimately give you a much higher return) or have a buffer of working capital....if you are in a start up for anything other than capital growth you shouldn't be in it.
I think getting a clause for formalising an exit for a minority shareholder where the majority shareholders buys you out is going to be very hard. They are naturally always going to want a discount to what they see as fair value. What you do need to make sure of is that there are pre-emption rights along with drag and tag etc.
Also it might be worth seeing if you can get your investment in the new company structured in a way that it is eligible for EIS relief....then you wouldn't have to pay CGT come sale time. That would be something I would really want to push for and doesn't cost the majority shareholder anything. You should check that with the company accountant. I suspect you actually need to write a cheque for EIS relief though. You would also get income tax relief on your "investment".
One thing that I would definitely want to know is who owns the IP/Patents if there are any ? It MUST be the company. There's a reason why the Dragon's always ask that question.
Things like dividends are very hard to nail down as you certainly don't want a situation where a company is forced to pay dividends that it can't afford. If anything I would want an agreement in a start up where dividends can't be paid for two or three years, ideally you want a company to invest in the business (which should ultimately give you a much higher return) or have a buffer of working capital....if you are in a start up for anything other than capital growth you shouldn't be in it.
I think getting a clause for formalising an exit for a minority shareholder where the majority shareholders buys you out is going to be very hard. They are naturally always going to want a discount to what they see as fair value. What you do need to make sure of is that there are pre-emption rights along with drag and tag etc.
Also it might be worth seeing if you can get your investment in the new company structured in a way that it is eligible for EIS relief....then you wouldn't have to pay CGT come sale time. That would be something I would really want to push for and doesn't cost the majority shareholder anything. You should check that with the company accountant. I suspect you actually need to write a cheque for EIS relief though. You would also get income tax relief on your "investment".
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