Benefits \ Disadvantages of making someone a Director?

[amaze]

Hi,

What are the benefits and disadvantages (to the company) of making a member of the senior management team a director?

I am currently the only director and shareholder and have considered making some of the SMT directors, but only if its advantageous to the business.

Thanks

[Free Lance]

There are no immediate advantages to you unless the promotion is seen as incentivising the staff. From a company law point of view, the directors take the day to day decisions for the company and they can do so by voting on one man, one vote basis.

What you don't want to happen is for the newly promoted managers to suddenly control the board because they outvote you! Anyone with more than 50% of the shares can remove a director (with some exceptions) but you don't want to go down that route unnecessarily.

From the manager's point of view, they might get a new title and a better view of / input in what happens in the business but they do not get any more money and suddenly become subject to a load of obligations/duties which they will hold as directors.

What the managers might want are shares in the company so that they get a share in the dividend. That is more valuable than a directorship. If you want to do that then there are tax efficient incentive schemes out there which are the best way to incentivise senior employees.

As soon as you are ready to introduce new management (directors) or new shareholders (owners) then you should have a shareholder agreement in place. This is especially true if you give shares away. Unless there is a provision in the shareholders agreement, once the shares are given to someone they are his to keep forever. The manager might leave but 15 years later on he will still hold a share in the company and be eligible to receive dividends!

There are simple agreements you can put in place to protect yourself from future problems with minority shareholders/directors. Have a look at the legal section (or under my login) and you will see that its quite a common problem.

PM me if you need details of a decent lawyer to help you out.

Good luck

[amaze]

There are no immediate advantages to you unless the promotion is seen as incentivising the staff. From a company law point of view, the directors take the day to day decisions for the company and they can do so by voting on one man, one vote basis.

What you don't want to happen is for the newly promoted managers to suddenly control the board because they outvote you! Anyone with more than 50% of the shares can remove a director (with some exceptions) but you don't want to go down that route unnecessarily.

From the manager's point of view, they might get a new title and a better view of / input in what happens in the business but they do not get any more money and suddenly become subject to a load of obligations/duties which they will hold as directors.

What the managers might want are shares in the company so that they get a share in the dividend. That is more valuable than a directorship. If you want to do that then there are tax efficient incentive schemes out there which are the best way to incentivise senior employees.

As soon as you are ready to introduce new management (directors) or new shareholders (owners) then you should have a shareholder agreement in place. This is especially true if you give shares away. Unless there is a provision in the shareholders agreement, once the shares are given to someone they are his to keep forever. The manager might leave but 15 years later on he will still hold a share in the company and be eligible to receive dividends!

There are simple agreements you can put in place to protect yourself from future problems with minority shareholders/directors. Have a look at the legal section (or under my login) and you will see that its quite a common problem.

PM me if you need details of a decent lawyer to help you out.

Good luck

Hi,

Thanks for your great reply.

There is no issue to asking for equity as its already been made clear this isn't an option currently, but maybe in 18 months. I am the 100% shareholder and will continue to be. It was just the director status.

So in short no real benefit for the business at this stage?

Thanks

[Free Lance]

Probably not. If there's no more money or effective control then the only benefit for the manager is a fancy title. From your point of view you would may find yourself having to wield your power wearing a shareholders hat rather than as you currently do as the sole director - its a bit more clunky.

OK. No shares now. How about an option scheme with an exercise price that is low enough to incentivise the employee but high enough to force them to hand over cash before becoming a shareholder. You can set the exercise period some time in the future, e.g. the 18 months you mention. No one gets any shares for 18 months and when they do they have to pay a little bit for them?