Share of startup business

[leotaro]

Hello

I have been approached by a small startup company with 2 directors. They want me to do some work for them and they said they will give me an equal share in the company in return. The company has 2 shares which are owned by the directors. They said they will make me a director and issue another share which they will give to me. I can ensure this happens before I hand over the work, but what is to stop them having a meeting and removing me as director and then issuing themselves another 1000 shares each, making my single share worthless?

Thanks for any advice.

 

[The Byre]

what is to stop them having a meeting and removing me as director and then issuing themselves another 1000 shares each, making my single share worthless?

A shareholders' agreement.

Though my 30 cents worth is to realise that they are making that offer because they have no money (and probably will not make any anyway) - and as a producer friend of mine once said (when someone tried to stiff him for his fee) "I lose all sympathy for a man when I discover that he has no money!"

 

[finleydesign]

As above, I agree, the reason they are doing this, is they have nothing to offer, very common amongst people who have little confident in their return, so distribute the risk without any outlay.

 

[Mark T Jones]

Buying shares (which is effectively what you are doing) is always a gamble.

Buying shares in a small, penniless start up is by far the biggest gamble of all.

If you are happy to potentially work for nothing, then at least be thorough and get a properly set up shareholders agreement.

 

[Paul Kelly ICHYB]

Great advice so far.

If you did go down this route, on top of the shareholder agreement, make sure you have the same class of shares as the other two.

I would not accept the directorship unless you will be paid for that from the start.

 

[leotaro]

Thanks for the great advice. I will ensure they have a proper shareholders agreement and that I get the same class of share. What are the disadvantages of accepting an (initially) unpaid directorship?

 

[Paul Kelly ICHYB]

What do you see as an advantage?

You have a shared responsibility for running the business and, my guess would be, the two existing people might want to limit that!

 

[Ozzy]

What are the disadvantages of accepting an (initially) unpaid directorship?

Being a director comes with legal responsibility and obligations which as only a shareholder you do not. Directors run the company and work for the shareholders.
If you do take on as a director then you need to make sure you know every in and out of the business, it's finances and what is going on inside day to day. If something goes wrong and the company goes under, you could find yourself in court and potentially struck off from being legally allowed to be a director of any other companies.

 

[Mark T Jones]

Thanks for the great advice. I will ensure they have a proper shareholders agreement and that I get the same class of share. What are the disadvantages of accepting an (initially) unpaid directorship?

Here are the responsibilities you take on as a director.

Being a company director

Understanding your role as director of a limited company and your responsibilities to Companies House.

www.gov.uk

The main downside for me though would be not being paid.

 

[The Byre]

It has been my experience that partnerships nearly always break up and usually in deep acrimony. The exceptions are usually because each side has clearly defined tasks and rewards. For example, One partner does R&D only and gets a royalty on each and every item sold - one partner only builds objects and is paid for every item built - one partner sells the objects and gets a commission - three separate companies that appear as one to the outside world but are paid according to what they achieve.

The idea that two or three people will always love one another and will always get along is great if they have known one another for years and years and that relationship has been tried and tested, through thick and thin.

 

[MattRumbelow]

As people here have said, get a professional Shareholders Agreement knocked up. If they're truly interested in giving you an equal share, the legal team might do something like create 100,000 shares and divvy that up in equal parts. The SHA may also describe what is expected from each shareholder, what counts as a 'good' leaver and a 'bad' leaver, etc.

It's good to have it all laid out, in my opinion.

 

[MikeJ]

If they can't afford to pay you, they can't afford a proper shareholder agreement. Unless they can find a lawyer that's willing to work for shares. Which they won't.