Shares and contract in Newly set up company

[beechfielder]

I am working with someone helping them set up a company. This person is a foreign national and I am British. He has offered me 10% of the company for my help with IT consultancy (my field), data protection help, grammatical checking of the web site, talking to business professionals etc.

The company has not been launched commercially yet, but a limited company was set up by the person concerned.

Before putting in many more hours, I would like something in writing about our agreement on the 10%. Also something that protects the other person and specifies what should be done on my part in return. Is there a simple document or legal template I could buy, which we could fill in and sign and get legal approval of? I might be naive about this, but if I simply get a letter from him stating that in return for my services setting up the business I am entitled to shares, will this be worth the paper it is written on?

We are going to get legal advice for certain things such as trade marks, terms and conditions etc, but would like to try and do as much as we can in advance as funds are not coming in yet.

I am not sure whether to suggest that I am a director and what that would entail. I was reading about non-executive directorship, which seemed as if it might be relevant as I am supplying my professional help and also liaising with various agencies to help set this up.

Thank you for any input

[M-C Hoare]

A simple letter or document signed by the two of you setting out the agreement is binding (as is the verbal agreement but the benefits of putting it in writing are that the chances of misunderstanding of reduced). It does not need to be in any particular form.
The 10% shareholding will have to be issued to you and if it is not then you can compell the other party because of the agreement.
If you become a director (non-executive or otherwise) you take on all the obligations and liabilities of a director, so you may want to make sure that this is what you want to do. The shareholding will entitle you to have a say, although as a minority shareholder this is limited. It will entitle you to a pro rata dividend when one is voted for your class of shares - you will need to ensure that you have the same class of share as the other person otherwise you may find that a dividend is voted for one class of share but but not the other and you won't get paid.
Do you really want to become an owner/director of this business or do you just want to be rewarded for your effort? If the latter, it may be better for you to have a consultancy agreement that you be paid at an agreed rate, with the agreement that you defer payment until the company is trading.
For more information on the duties of directors, there is lots of information on the BERR website and Addleshaw Goddard have produced a very useful booklet which you can request a copy of via their website.
Hope this helps.
Marie

[beechfielder]

Marie, That is really helpful, thank you

[The Dispute Resolver]

Its never a good idea to speculate on your time for as little as 10% unless the business is already running and earning or you are 100% convinced the business will succeed and you have 100% trust on the other party.

First step then is evaluate your contribution. If you are happy not to charge the other person , then insist the company pays this in time over and above your 10%. The 10% is to cover the risk that the company may not succeed to pay. It doesn't guarantee a penny even if the company is successful. He will dictate all expenses before the bottom line is reached.

Although Marie is correct that the letter amounts to a contract it would be foolish to go into this on such a flimsy contract. There are so many issues to cover, not least a Shareholders Agreement and issues of copyright etc. Certainly you should insist that you retain all rights to your work until paid by the company and that you retain the right to pull the site if not paid.

You also need to see his business plan and assess the liklihood of success. Good ideas/good websites do not alone make a business a success. How well can he fund the business? Offering 10% for the website etc suggests his funds are already limited.

[MartCactus]

You need to think about what a 10% share is worth.

Ordinarily it would entitle you to 10% of any dividend paid. So perhaps 10% of profit. But profit is declared after salary. If the chap running the company makes lots of money, he might decide to pay it out as salary, make very little profit and hence give very little to you. Any agreement should try to deal with these issues.

[mahutchinson]

There seems to be no reason to be a director unless you intend running all aspects of the company and taking on the legal obligations. This doesn't seem to be the intention.