need advice on share agreement, please.

[willone]

I have developed a new operation within my employers company which is now bringing in almost as much as the original business with lower costs. The understanding has always been that I would be given shares to illustrate my part in the new operation. At present, I'm in a strong position in that if I left tomorrow, my employer would quickly lose the business I've started because I have very specific skills and it's a niche market at an early growth stage, therefore, they will agree to terms and conditions i want written in - but what is it possible to write into a share agreement and how binding? I do have a lawyer BUT he works for clients of our business and I don't want to give him an inkling that I don't fully understand what I'm doing on the share front (which i don't) ! Therefore I'm after some knowledge on the basics!

I would be really grateful if anyone can assist me with the following :

Is it possible for number of shares held to vary in accordance with how much income is bought in by my operation realtive to the turnover of the business as a whole. This is fair but is it possible.

To be blunt, I want to prevent the Directors employing family members at inflated salaries with income from my operation as this would effect profits, especially as I work unpaid hours. Is a clause in a share agreement, requiring my sign off before any major expenditure physically possible given that i wont be a director. My initial share holding would be in the region of 25 percent of the business - the remaining shares would be held by the two directors - a Father and son.

I would be very grateful for any advice.

 

[Lime One]

It is possible to draft a shareholder's agreement on almost any agreed terms, however as a minor shareholder you will be unlikely, unless this is agreed by the other shareholders, to dictate salaries and family appointments. Whilst what you are suggesting is all possible, I think it will be very unlikely that the power you seek will be given to you. The shareholders 'own' the company so they can dicate to the directors what happens but as a minor shareholder unlikely they will give the power on expenditure to you. You may find also that their view on the shares you get have limited voting rights, this will depend also on the type of shares issued.

 

[Free Lance]

I agree that you can pretty much decide anything you want in your shareholders agreement - but a lot depends on the bargaining power of the parties. Although you will be a minority, it sounds like you are more akin to an investor than just an employee that the existing shareholders want to incentivise.

I often break the principles of shareholders agreements down into 3 categories or rights. The right way to go about things would be to have a mechanism that sets out how those rights go up and down rather than to have the number of your shares increase and decrease (very difficult to do - in fact way too difficult).

1. Dividends. As you point out, dividends can be jeopardised by paying inflated salaries. Consider an obligation to pay dividends if profits of a certain amount are achieved. You could scew the profits to give you more than your 25% if profits are achieved through your bit of the business (or reduced - vice versa).

2. Capital. If the company is sold/listed/wound up solvently are you expecting to receive 25% of the capital from that. Think the answer is yes to this but you could mess with your entitlement to a %age as much as you can negotiate (up or down).

3. Control. There are three elements to this.
(a) Shareholding. 25% will not prevent the other shareholders from taking important high level decisions about the company and its shareholding - issuing more shares, changing the articles, etc. There is a balancing act. The existing shareholders will not want you to have a veto on every such decision by giving you 25.1% (for example they bring in a genuine third party investor who wants to pay proper £ for his shares - they would not want you to stop that just because your shareholding would be diluted down). On the other hand you want to be able to stop them diluting you down by bringing in new shareholders for no reason. The answer is usually to incorporate bits from (c) below.
(b) Board level. Every day to day decision (hiring, firing, salaries, selling assets, borrowing, etc.) is a board decision. If you are not a director then you can negotiate attendance rights at board meetings so that you know what is happening to your company even if you cannot vote on it - subjec to the next para (c).
(c) Important veto rights (often referred to as Restricted Matters). Investors (which I am likening you to) will usually insist on a list of 10 - 30 matters that must get their approval before the company can take the decision. Your question falls into this category. You could insist that salaries above £x in aggregate are not paid, your bit of the business is not hived off and sold, you won't be unduly diluted down, there will be no transactions other than at arm's length, etc.

It's something you should take proper advice on. Your lawyer should be able to keep your info separate from that of your clients - in fact he has to. Nothing to be ashamed about if you are not an expert on shareholders agreements.

Good luck

 

[Chris.Sanderson]

Get a lawyer who knows the facts, I have been done over twice on so called "employee share agreements". No matter how much you trust or like your management, get what ever they present to you reviewed by a lawyer to make sure it is 100% legit and legal. Else you may find yourself holding a worthless piece of paper in a couple of years time.

Cheers

chris

 

[oldeagleeye]

You have the answer in your first post Willone

"I have developed a new operation within my employers company which is now bringing in almost as much as the original business with lower costs."

Fair enough I presume that you developed this in your firms time but to double the turnover at lower costs and you are not offered a directorship and only 25% of this new revenue stream. They are taking the mickey most.

You don't have any friends in business Will. I suggest then new company with you as MD and to maintain integrity offer them a 25% shareholding. Oh and get a different lawyer. He is their man as you say not yours. Rob

 

[fathippy]

Whilst I agree you shouldnt sell yourself short, you are still an employee of a company, and like it or not that should not lead to staging a "coup" on your department, and demanding autonomy.

If all employees were to start demanding ownership of any successful project then employers would think twice about the original terms of employment and there would be all sorts of prohibitive practices.

The crux seems to be getting correctly rewarded for your contribution, and this is just a matter of negotiation and leveraging what you can. However unless you have started out with a pre-defined agreement - ie you approached the directors with a plan and a suggestion of ownership split, then asking retrospectively is a little unfair. After all, there was a risk the venture didnt suceed, and meanwhile you have drawn a salary and I guess they have funded the R&D and building costs.

I am not trying to belittle your contributions, and by all means consider going solo if that allows you to benefit, but just think of it the other way round - you have set up on your own and built a business, and your employees were trying the same thing with you. It is all a matter of choice - whether to run the risks vs rewards, or to take the defined salary...

 

[The Resolver]

As has been well set out by Freelance, there is a lot to negotiate. Oldeagleye underlines your strength. I think your best move immediately is in the preparation for the negotiation. Not all lawyers will do this - many just asking what you want and then asking for it in the 'negotiation'. In mediation, the skill is to ensure both sides fully understand, first and foremost, what value they lose and damage they suffer by NOT reaching agreement. Rather than telling them how you have benefited them it will be equally , if not more, important to make them fully understand what damage they will suffer if they do not persuade you with a deal as well as convince them of the probability of that fact. For example, how difficult will it be for them to train another in the process? Is this a knowledge asset - who and what you know? Part of that 'damage' may well be whether there is a risk that you can deliver the process to competitors. I don't mean issue a threat of working with competitors, but there is a skill in making them realise such events are a possibility without saying you will do that. In fact you may turn that into an advantage by offering to be bound by a restriction against working with competitors in return for the shareholding/board rights you seek. You have to be realistic about the damage and risk of damage and then ensure you convince each of them in turn.

Good luck.

 

[oldeagleeye]

I take your point Fathippy but you missed 2. The first is that we are not just talking about exceeding sales target for the job here or the like but basically creating another business which as Willone said using his unique skills that probably had nothing to do with his regular duties and I have come across it time and time again where an employee has taken on his own back to get things going. Others where companies have complete ingnored the opportunity suggested by employees which in this case it seems have doubled the turnover of the company and reduced costs. That in my opinion deserves a directorship and a guaranteed profit share. Dividends as we all know can be minimised in all sorts of ways. Point 2. Think about it. We do not know the turnover but reading between the lines like doubling the turnover it seems to me to be a typical SME which may be just under the 10% capital gains threasehold and there may be other tax advantages in creating a seperate comapny.

With regard to your comment > If all employees were to start demanding ownership of any successful project then employers would think twice about the original terms of employment and there would be all sorts of prohibitive practices.

I repeat. We are not talking here about a 'project' that has had little overall impact on the company but single handed doubling the turnover of the company and isn't it about time anyway that employees demanded a fairer share of the profits in the company. Most give out a lot of hype these days about shared ownership but in reality is means little.

And finally. I did say not to forget about maintaining one's integrity in business by suggesting Willone offering the company 25% of the new company which as Freelance mentioned just goes to show the strengh of Willone's negociating strengh. Personally I would go for that because as I said there are no friends in business. Your implying that employers take a different view is absurd. The vast majority would have no hesitation whatsoever in asking for employees to take a cut in salary during a downturn. Would the directors - usually the main shareholders however give up their holidays and cars - no.

You go for your just rewards Willone and if they will not play fair by offering you a fair deal anyway. Offer them nothing and walk away with a clear concience.

 

[fathippy]

I understand where you are coming from, however it is more of a fundamental point that i am aiming at. That is the difference between business owner and employee. Once that line becomes blurred then it sets a dangerous precedent.

I am not sure whether the magnitude of the contribution matters, otherwise you would need to come up with a level at which it becomes pertinent, and that would be somewhat arbitrary.

As witnessed in the music or football industries there is no limit to the leverage that an employee can wield, and on that level then any negotiation on remuneration on a supply and demand basis must be applauded, even including "percentage of sales" or "image rights" as they are called. However these are still employees and are not taking ownership.

A good analogy would be the difference between debt and equity. Debt takes the first payment on and agreed basis, and whatever is left (including negative) goes to the equity holders. The debt holders have security and the equity holders take risk in order to get the reward.

I agree that what should happen is that employees take ideas to the directors, however they should pre-plan the ownership of the new "venture" and hence take some of the risk up front. A lot of these requests are posed AFTER the event, so it is somewhat from a risk free position. It is like the debt holders taking their interest payments, watching the company grow, and then asking to swap into equity later on. The question is whether if that particular project had failed abysmally and cost the company a load of money, would the particular employee offer to repay the costs, and the answer is probably no!

So in short, to the original poster, use all means you can to leverage off your new power as chief contributor to the business, and by all means ask to be paid in equity rather than cash, but dont expect to own something just because it has been successful.

 

[willone]

Oh, thank you everyone ! I would have thanked you sooner, but forgot to tick the box to be notified of replies.

 

[willone]

Actually, having read through the posts now. I'm amazed at how insightful the replies are considering how little i gave away. The company are not claiming any intellectual rights or similar because i had started on the project before i joined them, so that's not an issue. I'm not the bees knees ( it just so happens i have loyal contacts and came upon a great idea and have experience in a very specialist area...but 0 common sense re protecting myself) but at present, they could not replace me...give it a year or two or my further contribution, establishment of procedures etc. and the situation would change so i have 'power' for a limited time.
Two further questions :
If I asked for Directorship, would this give me greater rights than just a share holder? I could possibly get this - at least i can't think of a valid reason why they would decline...other than the possibility of my venture ceasing to be profitable. It's not fair that i have any claim to anything that was established beforehand - i would be prepared to give up my directorship if profitability from my operation reached 0...does anyone know if that can be written into the structure of a LTD company?

Within the business as a whole, my venture is self supporting and self-financing ...but the company itself, through other activities, has a debt - not a massive one, but a debt nonetheless. I don't know if there is any way to protect myself from this.

Thank you again for your kind help.

 

[willone]

Hi fathippy..re the part of your message...
''you have started out with a pre-defined agreement - ie you approached the directors with a plan and a suggestion of ownership split''

yes, that was exactly what happened. They agreed (ie we have offer and acceptance by email) and we have taken till now to get round to gettng something drawn up. Yes, i shoud have forced the issue more and not started out till thngs were in legally drawn up format- but at present, they have nothing to gain by trying to mess me around too much and are keen to get things sorted to as i have mentioned i'm unhappy things have been left so long.

 

[fathippy]

Good job I tried to distance my "hypothetical" argument from your original post, since it looks like you have done exactly what should have been done. I guess a lot is down to what was agreed in the mails originally.

With regards to the rights of a directorship, it may be more about the power and ability to influence the company that the "rights" which you would more associate with being a shareholder. Again, a lot will be in the small print, the company articles and memorandum, because even minority directors on a large board find themselves helpless. Bear in mind also, that a director can just be yet another employee, but with marginally more executive ability. However if there are only two directors, of which you are one, this is a whole different ball game, and you would be able to prevent the "mismanagement" that would see your equity stake put at risk, prevent the awarding of skewed salaries to minimise dividends, etc etc. Even if you were one of three or four, there is probably enough pressure you could apply with respect to being party to information that you could run past the DTI for example, to prevent any blatant mismanagement.

With regards to the shareholding part, most of the posts above were spot on when they said split into two companies. This would alleviate all your worries about profit transfer, and should not on the face of it create any extra problems for the existing business. Also, you may be able to come up with a host of reasons why it would be beneficial for them also to do this - tax breaks, liability reduction, etc. However asking for 75% may block this "deal" as they may feel exactly how you do now (that they could be abused as the minority) so I think the idea most likely to fly would be a clean 50/50 split on the newco.

As I started, however, it will all come down to the content of the original mails/agreements. If these were vague - ie "if you do well, we will see that you get rewarded" it may be harder work than if they were fairly well defined.

Good luck.

 

[Free Lance]

If you can get to be a director of the company that has your bit of the business in it, all the better. You might be a minority on the board but at least you will be able to better monitor what is going on with that company.

The DTI (now BERR) will not give two hoots about any dispute you might have at director level though so I disagree with the previous poster on that point. The BERR is simply not going to get involved - its not in their remit except in the most outrageous situations where the public need protecting from the worst breaches of company law.

If you are a director then you can use the information you get from that position to monitor the company and make sure none of the matters you have agreed (in a shareholders agreement for example) will require your consent are bypassed.