New company ownership design

[Andrew999]

I am new to this forum and looking for some advice before I approach solicitors / formation agents etc. to register a new limited company.

My question is about ownership structure - how do we decide what the new structure should be when we have four people involved?

Our situation:
Person 1 - Primary brainchild of new idea
Person 2 - Wife of person 1
Person 3 - Technical designer of supporting system
Person 4 - Business design / strategy / planning etc.

We want Person 1 to have majority ownership (and hence maintain control), person 3 to be reimbursed (hopefully via shares instead of cash) for work already undertaken to help get the idea of the ground but hold a minority position (prefrrably without any control of company direction) and person 4 to be a minority holder but be accountable for and drive strategy and long term planning.

Is this possible? If so how do we structure ownership and directorship?
Obviously I will check with a solicitor before we get going but I would rather go half educated.

Thanks in advance,
Andrew

 

[fastfences]

Hi Andrew,
Welcome. At the risk of sounding callous, if you can't get this worked out between yourselves, what hope have you got working togather within a business?

However, to be constructive, is there an objection about a 25% share each? From what you write, I would most definately be inclined to have the business 'founder' (person 1?) as Director and person 4 as Secretary.
I understand your scenario is made more complex by Posh 2; sorry, person 2. Is she 'productive' or is it a 'token' role? I forsee objection from others if they're putting in the yards and shee's out doing a 'Colleen' down the High Street. Of course I acknowledge that P2 is your wife, but I respectfully have offered what I forsee as the 'perception' of P3 & P4.

So, the final analysis. P1 - Director. P2 & P3 - salaried or remunerated partners or employees. P4 Secretary.
Cheers, NIgel

 

[Cornish Steve]

is there an objection about a 25% share each?

In general, it's not a good idea to divide shares equally. You want to avoid situations whereby there's a 50:50 split. To ensure decisiveness during the early days of a business, a 55:45 split is better. At least one of the four people should have a higher stake.

Giving the prime mover a higher percentage sounds like a good idea to me.

 

[Ozzy]

Hi Andrew,
Do you need to give up equity to the others? Are they putting anything into the business other than work which a paid employee should do anyway?

There are various tax advatages to having the wife of P1 as also being a shareholder to use her tax free allowance for income so that does make sense if the other are not share holders.
You could offer stock options to the others based on performance tied into employment contracts and time frames.

Personally, if you could afford it I would pay 3 & 4 for their time as employees with stock options and do a 50/50 split of shares between 1&2. Increase share capital at point of distributing shares if needed to maintain controlling stake, and offer directorship positions in the future again based on performance.
Don't give up too much too soon if you don't have to.

Now, insert disclaimer that you should also discuss this with an accountant

 

[Andrew999]

Thanks for the feedback.

Just to kick off, we are all openly debating the ownership structure which I think is a great start (not a bad start) to a new business venture. We all have on thing in mind and that is to make this a success.

I agree that we want to avoind equal splits to avoid conflicts and stand offs and also to reward the primary business drivers.

We are tying to avoid having to pay people (in cash) at this early stage because there is still a chance the business idea will not work (i.e. we are still undertaking research to determine whether the concpet has merit - there is about an 75% chance that the concept will work). Hence we keen to explore ways in which we can share risk at the early stages (obviously with everyone fully aware) without monetary cost. The reward is a stake in the company.

We rae keen to keep the tax advantages of the wife of P1 (as she doesn't currently earn an income elsewhere).

Ozzy - with your stock option idea - could we pay people with stock optiops only (i.e. no cash)? Could these be preference shares as opposed to ordinary shares such that they do not build up voting rights or is it best to stick with orinady shares (i.e. keep it simple)?

Thanks again
Andrew

 

[bwglaw]

As a lawyer the first question I would ask is what kind of business is it and what services are you going to be offering. Some forms of legal entity may not be suited to a particular group of professions, etc

You mentioned 4 people becoming involved. It does not say much as to what their true input will be. For instance, technical designer of supporting system. I am guessing this is software development? If so, then not only thinking about the allocation/issuing of shares you also need to think about protecting the business as a whole and this should be overseen by the most senior person, or a person with the highest stake.

You need to think about whether it would be safe to just employ some of them or whether to give them a stake in the business so that they will do their utmost to protect it.

If you know what you want you just need to go straight to a formation agent and register. Solicitors not needed unless you are looking for advice on the best way of structuring your business. Be prepared to pay at least £500 for the solicitor, plus any costs for drafting contracts etc

Now putting my CEO cap on. If I was in your position, presuming you are Person1, then I would appoint myself as Director, wife as Company Secretary and Persons 3 & 4 either share options or employees or both, or even freelance. I would not issue share options if they had no input of the original idea.

I am new to this forum and looking for some advice before I approach solicitors / formation agents etc. to register a new limited company.

My question is about ownership structure - how do we decide what the new structure should be when we have four people involved?

Our situation:
Person 1 - Primary brainchild of new idea
Person 2 - Wife of person 1
Person 3 - Technical designer of supporting system
Person 4 - Business design / strategy / planning etc.

We want Person 1 to have majority ownership (and hence maintain control), person 3 to be reimbursed (hopefully via shares instead of cash) for work already undertaken to help get the idea of the ground but hold a minority position (prefrrably without any control of company direction) and person 4 to be a minority holder but be accountable for and drive strategy and long term planning.

Is this possible? If so how do we structure ownership and directorship?
Obviously I will check with a solicitor before we get going but I would rather go half educated.

Thanks in advance,
Andrew

 

[Andrew999]

HandsonGroup - You have touched on an important point, that of IP protection. We are considering company ownership in part to help motivate IP protection - which is technology related.

I am actually person 4 and driving the business design / plan / structure etc. on behalf of the group. P1 has the technical competencies needed to drive the idea but not sufficient experience in business strategy / planning and marketting.

I am happy to take a minority position to assist the start-up but am concerned that P3, who is doing a lot of the behind the scenes development work is firtsly rewarded adequatley without removing control from P1 and is sufficiently motivated not to jump ship and take the IP elsewhere.

Additionally we are all prepared to put as much time is as needed but are keen to keep cash outlays to a minimum until we have determined that we have a solid technology that will underpin our business.

Hence our dilema - limited cash out, P1 as primary owner (>50%) reward P3 and P4 adequatley to keep IP in-house and motivation the team to drive the idea to fruition and P4 who is not the brainshild but is the one who can drive the stratgeic cocmpany direction.

I probably should have given this background up front but to be honest I wasn't sure what level of feedback I would get. I have been plesently surprised. So thanks.

Andrew

 

[Julie]

I wish this forum had been around when I started in business! Where else would you get this quality and breadth of input for free?

It's a superb resource, Ozzy (and Rob too? not sure who actually owns it!).

Thanks,
Julie

 

[Rob Holmes]

It's a superb resource, Ozzy (and Rob too? not sure who actually owns it!)

Ozzy owns it - I just help moderate

Rob

 

[Julie]

With style and flair, of course :wink:

Julie