Shares - the pitfalls and legals

[Onthebrightside]

Hi,

At the moment the company is owned by one person who owns all the shares, however, we're thinking of selling shares to someone who has been with the company from the outset and helped to build it. But we don't quite know how it works or what's required and have a few other questions:

• Does anyone have any suggestions of someone who could set up a legal contract for the shares
• Can that contract insist the shares are sold back to the company and if so can it stipulate the price of the shares being sold back.
• What difference would the shares make to the payment of dividends? The current owner takes dividends out of the company every so often.
• The company is just 3 years old but the work is steadily increasing - what do you think the share price would be?

If anyone can think of any further pitfalls or has any other suggestions - we'd love to hear.

Thanks in advance for any info/opinions offered.

 

[WaveJumper]

Hi,

At the moment the company is owned by one person who owns all the shares, however, we're thinking of selling shares to someone who has been with the company from the outset and helped to build it. But we don't quite know how it works or what's required and have a few other questions:

• Does anyone have any suggestions of someone who could set up a legal contract for the shares

Get proper legal advice on writing up new shareholders agreement

• Can that contract insist the shares are sold back to the company and if so can it stipulate the price of the shares being sold back.

You could write anything you like in the shareholder agreement

• What difference would the shares make to the payment of dividends? The current owner takes dividends out of the company every so often.

If you don't want them to have dividends or more importantly voting rights issue a different class of share ..... your legal advice should point you in right direction

• The company is just 3 years old but the work is steadily increasing - what do you think the share price would be?

Who knows - whats the value of the company now, plus the whole idea is you give me shares worth £5 now I want the company to be successful and shares worth £50 in a couple of years ........which begs the question why would I let you buy them back at a £5

If anyone can think of any further pitfalls or has any other suggestions - we'd love to hear.

Thanks in advance for any info/opinions offered.

 

[WaveJumper]

Make changes to your private limited company

Making changes to your company - passing resolutions, changing addesses and where your records are kept, your company name and type, directors' and secretaries' details, share structure, constitution

www.gov.uk

 

[Frank the Insurance guy]

Hi @Onthebrightside

I would recommend the guys at Devant - https://www.devant.co.uk/ They are great at this sort of thing (drafting contracts/shareholder agreements etc)

They will be able to sit down with you to discuss what you are looking to achieve and chat through the process and pitfalls. They can then draft the contracts/shareholder agreements for you.

Happy to make a personal introduction to them - just let me know.

I don't think they can help with the actual value of the shares etc though.

 

[Lisa Thomas]

I'd be happy to recommend a solicitor to you - feel free to dm me.

 

[Ozzy]

If this person is a member of staff, you may want to consider EMI share options instead of outright shares. As already mentioned discuss this with a legal adviser, and tax advisor too, and you can compare EMI options and share sale.

 

[JEREMY HAWKE]

What are the benefits to you and the company if this person has a stake

 

[Onthebrightside]

Get proper legal advice on writing up new shareholders agreement

You could write anything you like in the shareholder agreement

If you don't want them to have dividends or more importantly voting rights issue a different class of share ..... your legal advice should point you in right direction

Who knows - whats the value of the company now, plus the whole idea is you give me shares worth £5 now I want the company to be successful and shares worth £50 in a couple of years ........which begs the question why would I let you buy them back at a £5

Thank you so much for your info and help with this. Just one question if I may? How is the worth of a share calculated, for instance, if we wish to sell at £5.00, who calculates its worth £50 in a couple of years, what is the calculation that gives that figure? Apologies in advance if I'm being dim-witted.

 

[Onthebrightside]

Make changes to your private limited company

Making changes to your company - passing resolutions, changing addesses and where your records are kept, your company name and type, directors' and secretaries' details, share structure, constitution

www.gov.uk

Perfect, thank you.

 

[Onthebrightside]

Hi @Onthebrightside

I would recommend the guys at Devant - https://www.devant.co.uk/ They are great at this sort of thing (drafting contracts/shareholder agreements etc)

They will be able to sit down with you to discuss what you are looking to achieve and chat through the process and pitfalls. They can then draft the contracts/shareholder agreements for you.

Happy to make a personal introduction to them - just let me know.

I don't think they can help with the actual value of the shares etc though.

Thank you for this, I think we're obviously going to need someone to draft this for us and tell us what we can/cannot do.

 

[Onthebrightside]

Thank you for this, I think we're obviously going to need someone to draft this for us and tell us what we can/cannot do.

Also, can I ask, have you used Devant in the past to recommend them or know someone who has used them?

 

[Onthebrightside]

If this person is a member of staff, you may want to consider EMI share options instead of outright shares. As already mentioned discuss this with a legal adviser, and tax advisor too, and you can compare EMI options and share sale.

Thanks very much, I'll look into EMI share options before we consult someone to set up and explain the legals to us. I feel spending the money now in getting it right will save us expenses and heartache in the future.

 

[Onthebrightside]

What are the benefits to you and the company if this person has a stake

Thanks very much, I'll look into EMI share options before we consult someone to set up and explain the legals to us. I feel spending the money now in getting it right will save us expenses and heartache in the future.

This person is currently a sub-con but helped to set up the company, he fulfils a great deal of the work and is proficient in certain skills the company requires for its services. He has asked for some shares and it's difficult to turn that down when he's paid such an instrumental part in growing the company until now and states he intends to continue to do that in the future.

 

[Ozzy]

This person is currently a sub-con

If they are sub-contract and not employed, then EMI options would not be possible. At least not qualifying EMI options anyway, but unapproved share options but then it starts getting more complicated and you have to think is it worth it.

 

[WaveJumper]

In brief for a private ltd company share values are all going to be based around the perceived valuation of the company (there's plenty on info on internet about this) and if and when a time comes for selling or buying said amount of shares you will probably have to turn to outside help to value company ie accountant etc etc then both sides will have to agree fair price and hopefully a deal can be done.

Sounds simple but you have been around here a lot to know that emotions take over on this topic and in a lot of cases when trying to buy someone else's shares back it always appear to be because said parties have fallen out.

And barring the latter comment in mind this is where you really want a clear and watertight shareholders agreement in place spelling out the process's and clearly what the dispute resolution process maybe pretty sure @Clinton and the @The Resolver would have a view on this

 

[Clinton]

Thanks @WaveJumper

Thank you so much for your info and help with this. Just one question if I may? How is the worth of a share calculated, for instance, if we wish to sell at £5.00, who calculates its worth £50 in a couple of years, what is the calculation that gives that figure?

You're making the classic mistake that every small business owner makes ie assuming their business has value.

It doesn't.

The starting point should always be that it has a £0 value now and will have a £0 value in a couple of years.

In 2 years, if you want to sell some shares, you'll have to convince a buyer to pay more than £0 per share. If you can convince a buyer to pay £5 but not £5.01 per share, your business is worth this = (number of shares x £5.00).

That's it.

If you can't convince a buyer to pay anything, the business is worth £0.

If you don't have a buyer pitching for the business, you should still be thinking of the value as just £0.

Tough. Yes, but true. There will be people who choke on this advice and get all hot under the collar. They're idiots.

If there are two shareholders and one wants out, they have to convince each other of whatever silly number each of them has in their head and reach some agreement or, as usually happens in this case....

they get into a major argument, the business is affected, both parties walk away with nothing and go lick their wounds (because they were too stupid at the start and didn't get an SA)

That's how it works. Sorry, there isn't a nice convenient formula for you though I'm amazed that so many business owners think there's some magic formula. Strange!

 

[Frank the Insurance guy]

Also, can I ask, have you used Devant in the past to recommend them or know someone who has used them?

I've introduced many clients who have been very happy with Devant. Devant have helped them with a range of issues, from contract negotiations with customers, buyers, sellers, share agreements, succession planning and all sorts!

I've worked with them for over 10 years - they know what they are doing!

They will are usually happy to have an initial discussion to see if they are the right fit for you.

 

[BubbaWY]

Thanks @WaveJumper


You're making the classic mistake that every small business owner makes ie assuming their business has value.

It doesn't.

The starting point should always be that it has a £0 value now and will have a £0 value in a couple of years.

In 2 years, if you want to sell some shares, you'll have to convince a buyer to pay more than £0 per share. If you can convince a buyer to pay £5 but not £5.01 per share, your business is worth this = (number of shares x £5.00).

That's it.

If you can't convince a buyer to pay anything, the business is worth £0.

If you don't have a buyer pitching for the business, you should still be thinking of the value as just £0.

Tough. Yes, but true. There will be people who choke on this advice and get all hot under the collar. They're idiots.

If there are two shareholders and one wants out, they have to convince each other of whatever silly number each of them has in their head and reach some agreement or, as usually happens in this case....

they get into a major argument, the business is affected, both parties walk away with nothing and go lick their wounds (because they were too stupid at the start and didn't get an SA)

That's how it works. Sorry, there isn't a nice convenient formula for you though I'm amazed that so many business owners think there's some magic formula. Strange!

Ive long be interested in your thoughts (and respect them) on company valuations. But if the company has paid dividends say for a couple of years...and projections show future dividends...doesnt this add value to a potential incoming shareholder? Or does it simply come back to the shares being worth what the seller/buyer view them as being worth?

 

[Clinton]

I believe in fairies more than I believe in projections.

If a company has paid dividends in past years, has £100K in retained profits to part cover (together with future profits) dividends in coming years, that doesn't on its own make the company worth anything.

What if their net assets are £250K and they have a pending lawsuit with HMRC which they are on the verge of losing and which will cost them £1m when they lose?

The company is worth nothing till a buyer digs into the nitty gritty and comes to a decision on whether the company is worth £x or £y.

I had a client a few years ago in the vehicle industry - they made after-market products for vans and stuff. They seemed to be worth £8m based on comps - multiples that similar businesses had sold for at that time. I did my job ie finding them an M&A firm specialised in selling businesses in their sector. I handed them over to the M&A firm. They did what M&A firms do at the start - they dug into the company's accounts and documentation and records (not quite 'vendor DD' but a cut-down version of a vendor DD).

They found that the owner was being sued by multiple female employees for sexual harrassment, one of the cases was a bit more than 'harrassment'. The owner was trying to get the hell out before the sh*t hit the fan.

The M&A firm promptly dropped the business as worthless and unsellable. The company went insolvent within months.

But you should have seen their projections when I took them on! Very impressive figures and all backed by solid reasoning, calculations and spreadsheets.

 

[Onthebrightside]

T

Thanks @WaveJumper


You're making the classic mistake that every small business owner makes ie assuming their business has value.

It doesn't.

The starting point should always be that it has a £0 value now and will have a £0 value in a couple of years.

In 2 years, if you want to sell some shares, you'll have to convince a buyer to pay more than £0 per share. If you can convince a buyer to pay £5 but not £5.01 per share, your business is worth this = (number of shares x £5.00).

That's it.

If you can't convince a buyer to pay anything, the business is worth £0.

If you don't have a buyer pitching for the business, you should still be thinking of the value as just £0.

Tough. Yes, but true. There will be people who choke on this advice and get all hot under the collar. They're idiots.

If there are two shareholders and one wants out, they have to convince each other of whatever silly number each of them has in their head and reach some agreement or, as usually happens in this case....

they get into a major argument, the business is affected, both parties walk away with nothing and go lick their wounds (because they were too stupid at the start and didn't get an SA)

That's how it works. Sorry, there isn't a nice convenient formula for you though I'm amazed that so many business owners think there's some magic formula. Strange!

Thank you, a stakeholder agreement is clearly necessary.

 

[Onthebrightside]

In brief for a private ltd company share values are all going to be based around the perceived valuation of the company (there's plenty on info on internet about this) and if and when a time comes for selling or buying said amount of shares you will probably have to turn to outside help to value company ie accountant etc etc then both sides will have to agree fair price and hopefully a deal can be done.

Sounds simple but you have been around here a lot to know that emotions take over on this topic and in a lot of cases when trying to buy someone else's shares back it always appear to be because said parties have fallen out.

And barring the latter comment in mind this is where you really want a clear and watertight shareholders agreement in place spelling out the process's and clearly what the dispute resolution process maybe pretty sure @Clinton and the @The Resolver would have a view on this

Understood, thank you for the advice and information.

 

[Onthebrightside]

I've introduced many clients who have been very happy with Devant. Devant have helped them with a range of issues, from contract negotiations with customers, buyers, sellers, share agreements, succession planning and all sorts!

I've worked with them for over 10 years - they know what they are doing!

They will are usually happy to have an initial discussion to see if they are the right fit for you.

Thank you. This sounds excellent and exactly what we need. Things are moving quite quickly, a lot of work is coming through the door, so we're not just looking at a Shareholders Agreement, but also employment contracts.