Setting up company & dividing equity

[oaky18]

Just looking for some advice... 3 people agreed to go into business, 1 of them was made redundant so worked on the new venture full time from the start & 2 worked the new business alongside their current job for 6 months. The company was set up in 1 person's name, as the other 2 were tied by their previous employer's contract for 6 months/20 mile radius, with the intention of all 3 having equal share at the end of this. The person who has the company in their name now wants a 51% equity share leaving 24.5% each for the other 2, as they feel they should be paid for the 1st 6 months as they weren't in work like the other 2 & haven't taken a salary in the last 6 months like the other 2 have. No one has actually put any money into the business. Surely there must be some way to account for the money they have in the company that they don't want to take out & I just wondered what people's views are on paying them a salary for the 1st 6 months, the other 2 weren't paid by the new venture just had full time jobs. Also if they are all 3 directors what does the difference in equity share mean, would it affect dividend payouts each year? Thanks in advance..

 

[Lewy_T]

Tough one but IMHO if you have unhappy business partners from the start then something is bound to go wrong.

I have various shareholders in my business although I owned the business outright before attracting investment. The way I look at it is this:

The shares bought / owned within the business are set at whatever rate is decided from the start as agreed by the founding shareholders. BEFORE any work is done this should have been set out, or seperate agreements should have been done to cover any period where shareholders did not appear on the company register.

Any work done within the business can be treated seperately from the shareholding and generally attracts a salary, so that regardless of equal shareholding etc, the people doing the work actually get paid for it.

Obviously I don't know the ins and outs of your situation but if your guy has been doing all of the work then he should, IMO have been either agreed from the start to have more shares OR agreed to take a salary. If there is no money in the coffers to pay a salary then it can go as a loan on the balance sheet but you'll still have to run payroll for this and pay tax.

In terms of dividends, this is very simple, you declare a £1000 dividend and it is divided equally into the amount of shares in the business and issued to the holder of said share(s)

Maybe there is a deal that you can come up with where you put a value on the persons input for the first 6 months (maybe equal to what he would have earned in another role) and guarantee him this amount back from your collective shares of the first dividend?

Just a thought.

In future though, make sure you manage your relationship in writing and then you can't go wrong in the future, it will save a lot of head ache and probably eliminate plenty of fall outs.

Shareholders are totally different to employees within the business, just remember that, even if the employee also happens to be a shareholder, always treat the 2 seperately if you can, it'll be much easier.

 

[Billmccallum]

If there is no agreement in place before the fact it can be difficult to reach a conclusion that everyone would be happy with.

Given that no money was invested, it seems reasonable to look at how much time each member has spent developing the business and using this as an indicator.

If (A) has spent six months full-time (26 x 40 hours = 10.40), (B) puts in six months at 16 hours (26 x 16 = 416) and (C) puts in six months at 22 hours (26 x 22 = 572), so (A) gets 51.3%, (B) gets 20.5% and (C) gets 28.2% [for example only].

But its possible that one of the three decides that his contribution is of more value than the other two and seek to increase his share due to his importance to the business, as they all could....so it could be a case of nobody agreeing.

 

[3equals1design]

Just as oaky18 just asked, I am in nearly in the same situation. I have 2 partners both in full time employment and i'm working on the business full time. I have set most things up myself and have all the clients and in 2 months have money coming into our business account. As this is my only form of income in need a salary however we are now doing our shareholders agreement (and i realise we should have done this first) however I do not know the right way to approach this topic.

I was thinking on the same lines as Billmccallum as this would be simple and to the point, however I don't think my partners will agree.

My partners think that if I have a salary (however small or big) that the dividends shouldn't be equal as I would techniqually be taking more money. However my logic is that if i wasn't doing any of this work they wouldn't have any money in the first place. The other topic is that i want to get them out of their full time jobs so that we can be equal and i can get help as i'm working 20hours a day. So I would want to freeze their dividends until they are fully working for the business.

I've had 2 suggestions but i don't know which is more reasonable?

1. do as Billmccallum suggested and give shares in relation to the hours worked on the business.
2. I get a salary but we have shares, dividends equally.

please advise.

 

[Gedge]

This is just my opinion but I would suggest in both circumstances to pay the individual a reasonable salary for the time being put in. As has been previously stated, this should have been agreed long before the business started trading.

If I was the individual doing all the work and having an equal share of the company between 3 other persons, I would cut my losses and start on my own (assuming that there are no other mitigating factors such as capital provided, arrangements etc).

Gedge

 

[akirk]

If person A is working for the business and persons B & C are not - what is their justification for equity / role?

one of the biggest mistakes made by start-up businesses is the belief that all who are involved should be equal...

if you go and work for BT / Apple / Microsoft / the Civil Service / etc. etc. - do you believe that you should be equal / have the right to exactly the same as everyone else? of course not - so why do people persist in this with start-ups...

A company needs someone who can make decisions when all around can't agree - who will that be - they are MD / CEO / BOSS!

How will that be backed up through equity / etc.?

others who are then getting involved - what is their role - how important is it - could someone else be bought in to do the same role (on salary only) - if so, no equity...

these things should be sorted out as early as poss.

Alasdair

 

[3equals1design]

Thanks for your replies. I may have confused some things. Our company is within design and we all have skill sets that brings value to the company however the other 2 partners can't give that much time maybe 1-2hours a day. So I am drumming up the business, doing most of the administration (however i have given the book keeping etc to 1 partner) yet I'm also setting up workshops and sometimes acting as their PA.

this will pan out however I just wanted to find out the simpliest, fairest way for all parties, as I do want to work with them but need more their time than anything else and can't afford to carry everyone, otherwise as stated I could set up on my own.

Help

 

[oldeagleeye]

Classic mistake yet again between what is a shareholding and who is running the company. On the face of it then there should be a 3 way split in shareholdings and the OP should be paid a directors salary quite seperately if he has been running the company. If he has not been taking any salary and there is no money in the bank to do so then he is entitled to be paid by shares instead.

You have to ask your self then whether or not the 7.3 worth of shares or thereabouts that you are being asked to transfer to the other guy equal the time he has put in.

Simple ain't it.

Rob

 

[Philip Hoyle]

If ultimately the three of you will be making equal contributions, then the ordinary shares should be split equally to reflect the long term position. You have to remember that splitting 50:25:25 will last forever until he agrees to reduce his 50% holding - which he may never do, so it's not something you should accept. You need to come up with a better plan that works for you all.

In the interim, where one person is doing more than the others, you need a mechanism to reward that person. That could be in the form of wages as already mentioned.

Another option would be preference shares held only by the one person, so that he gets his reward first, then further dividends are split equally.

A third option would be to have 3 difference classes of shares, A, B and C, all with equal voting and capital rights, but with separate dividend rights, so all three of you have equal powers over the company but dividends can be paid to you individually according to agreement between you, i.e. you can pay all dividends at first to the A shareholder, and then once the initial effort has been rewarded, start paying equally to all three types of shares.