Employee Involvement in Business Investment

[David_Dublin]

I have the following situation in work.

I'm a director of a limited company. There is one other director. We each hold 50% of the company (50 ordinary shares, no other share types exist). It's a services company, so effectively we sell billable hours.

We're starting to work for a company that is interested in us providing services in exchange for equity.

At the end of the current funding round the company will be valued at €1.2 million. We are proposing to invest €120,000 in the Company as part of this round by way of sweat equity, i.e. we will hold 10% in the company. Their medium term strategy is to sell their company.

We haven't decided how the transfer of the shares will work, but probably it will work in arrears. i.e. in May we deliver 12k worth of services to them, we invoice them 12k plus VAT, they pay the VAT but pay the 12k by issuing us with 1% of shares.

The reason I am posting is this: I have a couple of employees that I want to benefit from any exit/profit we make on the sale of the customer's Company.

What is the best way to do this? Is it by issuing another type of share? Ideally there would be no tax implications for the employee. I'm looking for a simple solution, if there is one. I'd welcome any feedback out there.

Thanks!

 

[newtothis]

I'd make three comments:

- I would be very cautious: keep in mind that minority shareholdings in private companies very frequently prove to be worthless. At the very least you would need very strong shareholders agreements in place. Without them you will almost certainly be wiped out in any follow-on funding round. If cash is short, no agreement will be likely to save your investment, regardless of what happens.

- "Ideally there would be no tax implications for the employee" - you will find this practically impossible to deliver.

- You should get professional advice from someone with experience of the area, and this will not be cheap. An informal word with someone who's been there/done that is a cheaper option in the first instance.

 

[Brendan Burgess]

I know nothing about the tax implications of this complicated tax proposal and so these are just some ideas.

I second the other comments about the problems of being a minority shareholder.

You should probably provide the services directly to the company and not through your company. In that way, you would get the shares in your own names and not in the name of your company. You could allow your employees time off to work for the new company.

Brendan

 

[David_Dublin]

Thanks for the responses.

I need to look more into shareholders agreements, and how to get one that helps protect us against our investment becoming worthless with future rounds of investment expected.

I like the idea of getting the shares into our own names but not sure how we accomplish that within the constraints of us being a smallish business of PAYE employees.

 

[newtothis]

I need to look more into shareholders agreements, and how to get one that helps protect us against our investment becoming worthless with future rounds of investment expected.

Just to re-iterate, unless you have the cash to take part in any future fund raising, you will find it very difficult to get any form of shareholder's agreement to protect you if that fund raising becomes critical to continuing. Anyone putting in hard cash at that stage will expect everyone else to do the same or get out of the way if they can't/won't pony up. In those circumstances you have very little bargaining power regardless of what's written in any agreement. This isn't hypothetical: I've seen it happen myself on two occasions, and heard of plenty of other similar tales.