New director and shares - advice needed.

[whitej_d]

Hello,

We are about to appoint a new director to our company. The person in question was originally brought on board to help in the sales department, but has completely transformed it, and put in far more than was asked.

In light of this we are going to appoint her as a director and want to give her some equity for motivation and in recognition of her contribution to the company's success in these early days. The arrangement we agreed to go for is that she gets 5% equity (she has no money to put in, and although her commitment has been impressive she hasn't been exposed to any near the same personal risk as the other founding directors).

Along with the 5% equity, we would like to share any profits we take out of the company equally between the 3 directors, but only while all 3 are working for the company. If anyone leaves, the rights to profits revert back to the percentage equity.

The new director's shares will be given to her from the existing directors shares by prior agreement.

So basically it should end up something like this:
Share profit share
Director 1 44.5% 31.33%
Director 2 44.5% 31.33%
Director 3 5% 31.33%(5% after leaving company)
Other Shareholders 6% 6%

I'm looking for a few pointers on how to do this. I'll probably end up seeing a solicitor, but I like to be able to sound like I know what I'm talking about in front of them!

Would I have to set up a new class of preference share, and if so, how do I allocate them without affecting everyone else's percentage, and is it possible to set up shares with rules about rights to profits while working for the company and not working for the company.

Thanks,

Joe

[Richard231]

I would def. speak to a solicitor, but my (basic) starting idea might be:

(under the assumptions that your 'share' column is voting rights, your 'profit share' column is rights to dividends, and that when the new director leaves the business the 26.33% which she 'loses' gets split between the 2 founding directors?!)

Dir 1 'A' 44.5% 'B' 313
Dir 2 'A' 44.5% 'B' 313
Dir 3 'A' 5% 'B' 263 'C' 50
Other 'A' 6% 'B' 60

A = no change
B = authorised: 1000, issued: 949
C = auth & issued 50

Where A are ordinary shares with voting rights and no dividend rights and B & C are ordinary shares with no voting rights yet dividend rights.

You can pass a Special Resolution to amend you Memorandums & Articles to authorise the extra shares, that dividends payable to B and C shares are the same,and to stipulate that should a non-founding director leave the company, then their issued 'B' shares are to be redistributed among the remaining directors.

there will in total be 949 dividend paying shares issued (B&C). Ss dividends to B&C are the same (in your new Mem & Arts), the effective share for dividends will be:

Dir 1: 31.331331%
Dir 2: 31.331331%
Dir 3: 26.331331 + 5 = 31.331331%
Other: 6.006006%

the solicitor might say that this is an unfair amendment and come up with something else, but then that is why they make their money!!

At least it's a starting point for you.

Good luck!

If you wouldn't mind, could you let us know (or PM me) what happens - I try to use this forum to learn as much as share my wisdom!!

[FireFleur]

This is an unusual setup, though you might be able to juggle something in, I would wonder if it is wise though.

If you try and sell any of the shares to other investors what would happen in that instance? And if she sold some of her shares you would have to rejig all the allocations I think, and anyone else selling would have to explain how their % of dividend doesn't match.

It might be better just to look at bonuses, that way you are not tying two different concepts together.

Don't get me wrong, it is an interesting idea and I would like to hear how it pans out, but just gut feeling is that you are probably creating more problems for the business later on down the road.

[Richard231]

Well done FireFleur! I was thinking that it might make it interesting in the future - new directors, retiring founding directors etc. don't know what didn't make me suggestion other methods!

[whitej_d]

Hi,

Thanks for the advice and sorry I didn't reply sooner. You're right it does sound very complicated. I will look into the bonus option. I hadn't really known anything about them so that will be interesting.

I'll let you know how it ends up.

[cjd]

Big, complicated and expensive step issuing new shares and creating Directors.

Unless you've made promises, I'd deal with this through salary, bonuses and benefits - there's always a temptation to give away too much of the company in it's early days.