Company ownership and control

[MrOats]

Hi,

Advice needed please on a company setup situation...

I'm starting an IT business with two colleagues, we're due to kick off in a few weeks with our first customer.

Initially there were two of us, and we formed a Ltd company with a 50% stake each. This has not yet traded. However, we quickly realised we were inexperienced in terms of setup and business operations so brought in a third colleague who is older, more experienced, has started a business before and importantly has many contacts in our market. For context I have worked with this guy closely for 4-5 years and we generally trust each other and think on the same wavelength.

We initially agreed verbally to split the business 1/3rd each as there's three of us. Since then the new dude has been a clear leader, used his strong relationships and experience to negotiate some good vendor deals who take him seriously, and has put in £20k to get marketing going. (the original two have not put in any investment). Frankly, we wouldn't have got this far without him.

Along the way, we all decided to change the company name and the new director created this company with just himself on it. We are still on the original company that isn't trading. He now wants 51% control of this new company with the other two sharing the rest. This is on the basis that (a) he's put all the money in, (b) has the experience & contacts and (c) will essentially be the MD.

I need advice pls on how to take this. I am admittedly naïve having spent 25 years in corporates as an employee. I don't have a problem with the majority control necessarily I just don't want it to be a stitch up as we're not even listed on this new company at all at the moment. What's people's views on this, is it fair or crazy? What should I be concerned about or discuss or get locked down?

Thoughts and views appreciated
Thanks

 

[WaveJumper]

So you had a meeting and decided to Change the name but the new guy set up a new company you haven’t just changed a name a new entity has been formed and I’m guessing the guy who’s put up all the money so far has 100% control. So I would think quite rightly he wants the controlling stake the question he maybe asking himself is does he need anyone one else and if so what are they bringing to the table.

if you are going to be part of the new company you want to make sure you get proper legal advice over the shareholders agreement and a very clear understanding of your role / position etc in this new set up.

 

[MrOats]

So you had a meeting and decided to Change the name but the new guy set up a new company you haven’t just changed a name a new entity has been formed and I’m guessing the guy who’s put up all the money so far has 100% control. So I would think quite rightly he wants the controlling stake the question he maybe asking himself is does he need anyone one else and if so what are they bringing to the table.

if you are going to be part of the new company you want to make sure you get proper legal advice over the shareholders agreement and a very clear understanding of your role / position etc in this new set up.

Thanks. Yes for reasons mainly to do with existing employment obligations it wasn’t a rename it was a new company in the new name, the two of us can move over now we are able.

Having spoken with new guy, it has transpired in the last few months that he feels he is doing all the setup/fronting all the cash, and that the other two aren't driven or sharp enough to run it. This is fair to an extent, but I bring some key skills that are hard to find elsewhere and over the years I have built up a strong working partnership with new guy. The third member is inexperienced and a bit immature, but a known quantity and very talented.

I think new guy is concerned the two of us will drag it down and despite relationships, wants legal assurances. Given I’m not on the new company at all any income we earn will go to new guy, and currently I am also no longer employed, so feeling a little exposed so was worried it’s a play for control now we are vulnerable & need to be earning.

 

[Mark T Jones]

Nobody can answer whether the split is fair or not, there are just so many variables and unknowns

The important thing is that you all sit down and agree on things - culminating in a comprehensive shareholders agreement

The good thing is that you seems to be talking and getting things on the table before diving in too deep.

 

[japancool]

I think the question for you is - if he takes all the business to NewCo, how difficult would it be for him to replace your skillset? You say the skills are hard to find elsewhere, but are they impossible?

Make sure any dividend policy is written into the shareholders' agreement so he can't take money out without your agreement, and make sure you agree (in writing!) any salary you will be entitled to draw. At 51%, he has majority control, so you may want to ensure that decisions are reached through a qualified majority.

 

[MikeJ]

I'd tell him to take a hike. Imagine this turns into a multi million pound business. You're going to look back on this and think he's screwed you out of a chunk of the company. You're never going to be happy.

Offer to put the £20k down as a loan, so he can get the money back once you're in profit.

 

[MBE2017]

Your new partner has shown you he is worth his money, he has the contacts, he has invested the money, all on his own. In his place I think I would be asking does he need any of you, and why is he being so generous?

From your viewpoint you have lost control of the business idea, but at least there is a business to argue over. Your main problem with him having 51% control is it will always be his way or the highway.

As Mark mentioned before, better to have these discussions now, if you decide to go with it, the biggest problem is how are conflicts solved?

 

[MrOats]

Your new partner has shown you he is worth his money, he has the contacts, he has invested the money, all on his own. In his place I think I would be asking does he need any of you, and why is he being so generous?

From your viewpoint you have lost control of the business idea, but at least there is a business to argue over. Your main problem with him having 51% control is it will always be his way or the highway.

As Mark mentioned before, better to have these discussions now, if you decide to go with it, the biggest problem is how are conflicts solved?

Thanks for the advice

It's not the first time we've discussed this, and realistically I think it was "new guy" who originally planted the idea in my head of doing our own thing over a year ago, so you could argue it's been his idea from the start perhaps I never had control of the idea. It was a case of "hey new guy, you remember that idea, well we are doing it do you want in"

He describes me as the best he has ever worked with in my field as I am both technical and good with people. If that is true, then whilst anyone is ultimately replaceable we do have a spark, a way of working, that has made us very successful in our old company.

My issue is I am not really motivated by control. I'm not an natural director, but a good operator. I am good at what I do, love doing it, and want to do that in our own business so that we can reap the benefits and secure our future - and I know I won't get that working for someone else. That's my motivation to take this leap. So I can't really say the 51% stake even matters to me - it's more the shift in opinion that has got me rattled and I am maybe more just worried about being shafted, left with no role and having wasted months on building it up.

 

[WaveJumper]

You need to take the emotion out of this and put your business head on otherwise I predict you are going to end up sitting on the sideline with nothing.

Just to clarify - the new guy set up a new company so far what stake in this have you or any of your other friends actually hold.

 

[MrOats]

You need to take the emotion out of this and put your business head on otherwise I predict you are going to end up sitting on the sideline with nothing.

Just to clarify - the new guy set up a new company so far what stake in this have you or any of your other friends actually hold.

New guy - only person listed on the company, relationships/promises with vendors and customers all with him. Mainly because he's business development and that will be his role.

other two of us - no stake in new company just names on the initial company which isn't linked to anything.

This is why it feels uncomfortable. I have assurances from new guy, who I have trusted up to now, that it will all shift across and he's sorting shareholder agreements. We talk every day and we are having joint meetings with prospects etc - But I am feeling exposed.

 

[MrOats]

You need to take the emotion out of this and put your business head on otherwise I predict you are going to end up sitting on the sideline with nothing.

Just to clarify - the new guy set up a new company so far what stake in this have you or any of your other friends actually hold.

PS thanks for taking the time to reply again. I feel very inexperienced!

 

[WaveJumper]

I am sure other members will have a view but some very big red flags flying here I just hope he is true to his word ......... but he's well and truly in the driving seat.

 

[MrOats]

I am sure other members will have a view but some very big red flags flying here I just hope he is true to his word ......... but he's well and truly in the driving seat.

Thanks. Good summary. Don't have a problem with not being the driver, but a lot is going on trust. Any thoughts on what I should do? I am considering just demanding to be on the company paper before moving forward any further. Eg. if we win some work and I am not listed at all, i'm not even legally involved.

 

[MarkOnline]

New guy - only person listed on the company, relationships/promises with vendors and customers all with him. Mainly because he's business development and that will be his role.

other two of us - no stake in new company just names on the initial company which isn't linked to anything.

This is why it feels uncomfortable. I have assurances from new guy, who I have trusted up to now, that it will all shift across and he's sorting shareholder agreements. We talk every day and we are having joint meetings with prospects etc - But I am feeling exposed.

I think its a question of trust, the way he has formed this newco makes me believe he is untrustworthy.

He has used your initial business arrangement as a tester, now he can see some legs in it he wants control. I wouldnt want to be involved with someone who has acted in this way, but there again I am in a position where I can afford to walk. A small percentage of something may be better than a lrger percentage of nothing.

Good luck.

 

[fisicx]

This is how it looks to me. This person has seen your idea and thinks they can make a lot of money. To do this they have set up a company and invested money in marketing. They will now use your skills to enrich the new company. Your company will get a share of the profits. It's very unlikely you will ever be part of the new company.

If they can find someone with the same skillset they won't even need you anymore.

 

[MrOats]

I think its a question of trust, the way he has formed this newco makes me believe he is untrustworthy.

He has used your initial business arrangement as a tester, now he can see some legs in it he wants control. I wouldnt want to be involved with someone who has acted in this way, but there again I am in a position where I can afford to walk. A small percentage of something may be better than a lrger percentage of nothing.

Good luck.

I should have clarified, but we all three of us talked about the idea initially a year ago. New Guy has arguably been the instigator from the start. We all met with our wives/partners too, a long time ago, to flesh out the basics of what we were going to do. Then me & other dude kicked it off and brought New Guy in when we needed him. Timing is the only reason new guy wasn;t in it from the start.

Now, that doesn't mean there aren;t red flags here as to how he has set it up I just didn't make it clear that it;s not an idea-stealing scenario.

Thanks for your comments I appreciate it. it does make me consider if it doesn't feel right now perhaps it won't ever be.

 

[MarkOnline]

I should have clarified, but we all three of us talked about the idea initially a year ago. New Guy has arguably been the instigator from the start. We all met with our wives/partners too, a long time ago, to flesh out the basics of what we were going to do. Then me & other dude kicked it off and brought New Guy in when we needed him. Timing is the only reason new guy wasn;t in it from the start.

Now, that doesn't mean there aren;t red flags here as to how he has set it up I just didn't make it clear that it;s not an idea-stealing scenario.

Thanks for your comments I appreciate it. it does make me consider if it doesn't feel right now perhaps it won't ever be.

Doesnt really make any difference as to when he "joined" yourself and your partner, he's a snake and now you know. Whatever happens in the future, you have been warned. I think there's a saying "Actions speak louder than words"
Ultimately you do what you feel is right for you and your family.

 

[japancool]

What is the proposed agreement? That between you and the junior guy, you will own 49% of NewCo, or that OldCo will own 49% of NewCo?

 

[MrOats]

OldCo will cease to exist. I will take 33% of NewCo other junior guy takes the remainder. Split is based on the value we bring to the company.

 

[MrOats]

What is the proposed agreement? That between you and the junior guy, you will own 49% of NewCo, or that OldCo will own 49% of NewCo?

OldCo will cease to exist. I will take 33% of NewCo other junior guy takes the remainder. Split is based on the value we bring to the company.

 

[MrOats]

Doesnt really make any difference as to when he "joined" yourself and your partner, he's a snake and now you know. Whatever happens in the future, you have been warned. I think there's a saying "Actions speak louder than words"
Ultimately you do what you feel is right for you and your family.

Thanks. Good perspective. I think I am getting to a place where a shareholder agreement needs putting up now to ensure New guy is being genuine, or it's not going to work.

 

[japancool]

OldCo will cease to exist. I will take 33% of NewCo other junior guy takes the remainder. Split is based on the value we bring to the company.

That sounds better, but perhaps you could make a counter-proposal. Between you, you and junior guy own 49%, he owns 49%, and an unconnected third party owns the other 2%. I believe @The Resolver does a service along these lines.

 

[MrOats]

That sounds better, but perhaps you could make a counter-proposal. Between you, you and junior guy own 49%, he owns 49%, and an unconnected third party owns the other 2%. I believe @The Resolver does a service along these lines.

That;s a really interesting idea. Thanks.

There's many sides to this. We are making good pipeline from contacts that both myself and New Guy have brought to the table. It's all open and discussed in that respect.
However, I then remember I don't have access to the bank account and initially my wife (an ACA) was going to run the finances but New guy has a local accountant now. Under the guise of not bringing family in, not an idea I am immediately opposed to but when you add it all up....

 

[Mark T Jones]

Only you can decide what a fair split is - I suggest you take yourself forward 24 months to consider how things will look then.

Not just on shareholding but on strategy, responsibilities, rewards and everything else.

 

[Paul Kelly ICHYB]

Based on the way you appear to be going, this is the best idea so far.

, you and junior guy own 49%, he owns 49%, and an unconnected third party owns the other 2%. I believe @The Resolver does a service along these lines

However, I would possibly remind you of something - directors and shareholders are different things.

Everything depends on your thoughts and end game, however, consider the following:

• Your new partner appears to have gone off and done things without discussion or your approval - that would start to get my spidey senses tingling
• Keep the shares split even and pay him more of a wage than you
• Keep the main shares split even but create a second class of share with non voting rights - that would give him greater returns than you but means he cannot just go off and do what he wants. I believe you could also limit the value of his shares

Whatever you do, get a specific shareholder agreement done.

 

[The Resolver]

I believe @The Resolver does a service along these lines.

Just seen this. Japancool is referring to my service at www.Mr2Percent.com . The website has not formally launched as still (slightly) ncomplete but will be shortly. I will read tomorow and post my thoughts here.

 

[The Resolver]

Whilst there is need to exercise caution due to the third guy setting up a new company on his own and then demanding voting control , there is no point in raising this with him (and the temperature at the same time which could lead to unresolved conflict) but rather focus on a new and detailed arrangement, .This would include possible additions/amendments to the Articles of Association and , a Shareholders Agreement. You all believe there is a good business, you have the necessary skills between the three of you, and the first customer is about to sign up. Nothing he has suggested can be enforced on you although you need to know what practical and legal options he has to 'steal the business from under your feet'.

I can advise you on a way forward and what you must insist on in a Shareholders Agreement (full access to the banking, a right to which you have in law anyway as a Director but which you must insist on, is not negotiable).

Its hard to advise without knowing the detail of the business and its practical elements (has he purchased assets vital to delivering the service, is there evidence that you agreed at one stage to run the business equally betweeen you all so that, for him to set up on his own, would amount to breach of contract?) . You are welcome to call me/book a call, as in my sig.

 

[dylanmarlais]

You will need a shareholders agreement. Money spent on good advice now will be money well spent. You will be a minority shareholder.

The other shareholders will hold 67% if they decide to act in unison.

In any event, a majority shareholder (51%) will be able to exert significant control regarding some important areas.

For example, will you be a director? If not, the profits could end up being paid out to those who are directors. If you start out as a director, the majority shareholder could pass an ordinary resolution removing you as a director.

If you are unhappy with the way the business is being run in the future, you will have limited rights as a minority shareholder. But all these issues can be covered in a well-drafted shareholders agreement. It is likely that the parties are in a very cooperative mood at the moment and the majority shareholder will be willing to agree to reasonable minority protection rights in a shareholders agreement.

But why does he want 51% in the first place? Have you asked him? If he thinks he is putting in more than you, you could have an equal number of shares and he could be rewarded by remuneration under a service agreement for the work he is doing and his valuable expertise and experience. But remember that even with all three of you holding 1 share each, you are still a minority shareholder and the others could vote together against your interests. Therefore, you will still need a shareholders agreement.

The £20K he is putting in could be by way of a secured loan or the company could issue him non-voting preference shares. This will preserve you being all equal shareholders and all having the same level of control.