Buying shares in private company: Advice

[AC130s]

Hello All, i am new to this forum so would like to introduce myself.

I have read lots of forum posts regarding "Buying shares in private companies" so my apologies if this thread seems "repetitive" however i do feel my situation is quite unique.

Background

I started working for my current employer 5 years ago when i joined the company as a junior, since then i have rapidly grown my role within the business and now the head of sales (for our sister company). I have been offered some unique opportunities throughout my first career by my employer (the owner) and now its lead to an opportunity to buy shares in said company.

Opportunity to buy shares

Last year i was offered a commission incentive for all my sales and since that date i have amassed around £10,000k+ in commission. My latest commission claim lead to a discussion that i could invest some of my sale commissions in company shares and thus receive dividends/own some of the company which i have been very influential in building.

I have a few reservations about this as i have very limited knowledge on the subject, hence my request for advice. My boss/owner is a very successful entrepreneur and i am no stranger to the fact he gets the most out of people... that being said i am also (without sounding arrogant) an invaluable addition to the group and the risk of losing me would be detrimental to the business. I do not think ill be "stitched up" but i am cautious of how i proceed.

A few areas of concern i have are as follows;

• Who decides dividends and how much?
• As dividends are based on the profit made could money be moved from sister company (shares owned) to mother company (shares not owned) and thus reporting less profit with myself receiving less?
• If i am buying shares who values these? and i i am invest say £10k-20k will i ever earn this back + more?
• Are there any tax implications?
• Can i sell my shares?
• Does buying shares automatically make me a director?
• What if they owner decides to close the business or transfer this to a new limited company would my shares then become worthless?
• Is there any way to protect my investment?

As far as i know it there are 2 directors in the company, any advice would be highly appreciated.

Thank you and best regards,
Andy

 

[STDFR33]

1, The board decide if there will be a dividend and the level of any dividend.

2, Dividends are declared from retained profits.

3a, You ought to do an independent valuation. 3b, Who knows?

4, Yes

5, Yes, but there will probably be restrictions in who you can sell them to.

6, No. It makes you a shareholder.

7, If the business was transferred, it should be done at market value. With you receiving equivalent shares in the new company, or the £ equivalent of the value of the shares.

8, Ensure that the business remains profitable and that the majority shareholder doesn’t try and shaft you.

 

[Socio South West]

Being the Devil's Advocate.... converting debt/outgoings (ie your commission) into equity is a well known route for companies that want to reduce their outgoings, and may not be a good sign for the longer term.

If you become a shareholder, there is no way you can protect your investment. As - presumably - a minority shareholder you will probably have no more influence on the business than you do now, and actually as a shareholder you will be more committed to the business than you are now.

You could continue at the sales level you are at, but the profits may dive for whatever reason.... and thus there would in all probability be no dividend to draw: They are asking you to gamble your earnings on the company's continued success.

Don't believe you won't be stitched up. From what you say, my advice would be to decline the offer and continue as you are - it seems you are doing very well and earning well - why risk that?

 

[Chris Ashdown]

A small or even 50% of a company is hard to sell to anyone outside the company that's a fact

without being made a director you have no say in the company and therefore no vote in the running of the company apart from a shareholders vote, Only directors run the company

If they made you a shareholder they would no doubt put restrictions on what you can do with your shares and most likely how they would be valued if you sold up or even left the company you could be forced to sell them at a fixed price

Unless they make a unbelievable offer I would suggest you stay where you are

 

[LiveNetworks Ltd]

Yup, I'd agree with everyone here, shares only have value from the dividend they earn and the value when you come to sell them. In both cases, Dividends are out of your hands and the capital value of the shares could be zero even for a profitable company. Who wants shares in a company when they have no say in how it's run and what the dividends could be.

Having the shares will make you feel trapped. If a better offer comes along, you're going to be potentially giving away your shares for free. With the salary and commissions you're more likely to walk and that should mean they'll keep rewarding you.

 

[KAC]

If you decide to go for the shares, you must ensure that you have a shareholders' agreement with which you are happy. Speak to @The Resolver

 

[AC130s]

Thank you everyone for the advice and feedback, its been really great as i am learning the ropes in the world of business. I must say i do not feel pressured to make this decision and free to invest how i see fit but the concerns still loom over me. Would shares/directorship change this outcome? Thanks again all.

 

[The Resolver]

Let me expand a little on the advice given above:-

I would not reject shares out of hand simply because they are a minority. If that were the case there would be no venture capitalist! If the company will grow you could earn a return far in excess of what you would earn in commissions.

The law gives you protection, eg against decisions of the majority that are unfairly prejudicial to you such as by diverting profit to another company, and a right to sue the directors in the name of the company for compensation for anything they do that amounts to a breach fo their duties such as by making bad decisions no reasonable director would make, diverting profit or acting not in the interests of minority shareholders etc.

Ultimately a court could , in the above circumstances, force the majority to buy out a minority shareholder at market value.

You need to watch out for being given shares in different class fo shares that enable them to issue separate dividends for the separate cases. If one class then you earn at the same proportion as the others earn.

You should advance discussions ,see how much they offer and insist on a Shareholders Agreement with protection for you.

PM me for a free 20 mns heads up advice on the sort fo matter to raise in negotiation and in a Shareholders Agreement . Also check out my site at www.boardroomresolve.com to learn about the vitally vitally vital (quite big) importance of shareholders agreements.