Advice sought regarding shareholdings

[SupaMax]

I'm in a position whereby I've invested a lot of time into a company that I believe has growth potential. The inventor of the product and I have developed this product over the last 6 months, so much so, that the launch is imminent. From a business perspective the owner is, admittedly clueless. My involvement has been from a business, product/technical development and networking perspective.

I've a few questions that I'd be most grateful of your feedback on:

1. We're soon to be drafting the shareholders agreement. What are the benefits of leaving some shares unallocated?
2. A university has a 10% share in the company - from experience, can anyone highlight any issues this may cause or anything I should look out for?
3. Before I got involved, the inventors brother invested into the business and so has been allocated 10%.
4. Like I said, I've been heavily involved and continue to be involved in all key decisions. With the limited information I've provided, what would you propose a fair share split would be (taking into account 20% is already accounted for).

I look forward to hearing from you on this matter. I'm sure, given the number of related posts, that many of you are in a similar position so I hope this sparks a response.

 

[Shahkti]

Based on the information you've provided:

1. We're soon to be drafting the shareholders agreement. What are the benefits of leaving some shares unallocated?

If there are a large number of founder shareholders then it can be useful to leave a block unallocated for sale to investors. It can save having to explain share dilution to non-financially astute shareholders. As that doesn't apply here, I'd allocate all and just dilute when future money comes in. One exception might be to hold back ~10% if you expect to have employees with share options (the share option pool).

2. A university has a 10% share in the company - from experience, can anyone highlight any issues this may cause or anything I should look out for?

Ask for, read and get advice on the IPR agreement. Watch out for any non-exclusivity clauses. If there is no IPR agreement, you need one or your money/time is at risk forever.

3. Before I got involved, the inventors brother invested into the business and so has been allocated 10%.

Noted. How much he put in and when could be useful in a pre-money / post-money valuation.

4. Like I said, I've been heavily involved and continue to be involved in all key decisions. With the limited information I've provided, what would you propose a fair share split would be (taking into account 20% is already accounted for).

Of the remaining 80%, 40% each. If his invention is unique and he could get dozens to replace you, your position is weakened. If you have put in a considerable amount of money and your commercial awareness and contacts will make a key difference, then your position is strengthened.

But only you know the negotiation space, so consider my answer to the the default view.

 

[SupaMax]

Thanks for a great response. Regarding the split, he's got this idea in his head that he 'must' be the majority shareholder. On the other hand we both know that it would be difficult to replace the team, albeit two-man! So, I guess it might be the time for me to put some offers on the table and push for the 40%! I've actually got nothing to lose anyway - apart from my already expended efforts that is.

Other than this, I'm thinking that if I don't get the 40% then I request for a % of profits per sale or something similar that would, in effect, equate to a wage.

 

[The Resolver]

Some tips:-

1. If he , as you say, is clueless in business terms, then it is pretty important he does not have overall control . Forget taking % of revenue.

2. Assume the brother will always support the inventor so effectively giving him 40% gives him 50% in voting terms - ie blocking rights.l

3. I presume he invented the item in some sort of university incubator/facility.As has been mentioned here, they likely may have some IPR rights that need carefully looking into.This is a vital area.

4. It may make sense to separate the commercial risk from the IPR , ie two companies one owning the IPR and then entering into an exclusive licensing agreement with another company set up to commercially exploit the IPR. In this way you can give him the majority of the IPR owning company, indeed the University can have its 10% in that company, and you have the majority shares in the trading company. This way you control the business end of things and he controls the product and if the trading company suffers from any of the usual trading risks in future (better cheaper competitor, over-trading or whatever) and has to be liquidated ,the IPR is preserved to exploit through another company - but then you need carefully worded shareholders agreement and licensing agreements to protect your interests in any future (and legal) 'phoenix' company.