Working for equity

[WordIsBond]

Could there also be VAT considerations if the value of the work would take him into the lower VAT threshold as a self-employed individual?

VAT: part-exchanges, barters and set-offs - GOV.UK

As a director, this relationship for tax purposes would be one of employment, not B2B. It matters not that he's running another business elsewhere. Non-exec directors of companies don't have to consider VAT on their director's stipends (whether in shares, options, or cash) even if they are running a business somewhere else.

[ittony]

Generally shares given by an employer are taxable. There are various schemes that allow some tax relief. Perhaps of most interest in this case would be Enterprise Management Initiative (EMI). Google it and see if it would apply.

You have to value the company. I'm assuming it is not publicly traded, so you're going to have to come up with some way to put a value on the shares. If you are really going to do this yourself, Google Company Valuation Methods, look around, choose one commonly suggested (and thus easily defensible) that gives a low price. Alternatively, pay someone to value it, there are people who do this for probably not a lot of money for a small company. They are banging on my door so they want business, so you can probably get a good price for the service.

Do your research first so you know what you are talking about and if an accountant knows what he's about, but then talk to an accountant. You don't want to blow this one, this can be a very expensive mistake if you don't do it right from the first. He may recommend using a company valuator.

Sounds like a multiple of revenue or earnings would give a more expensive price than net asset value, if the debt is that significant. So maybe tip the valuation scale towards NAV -- if it is going to be taxable now or later, you want the value of the shares to be as low as you can defend.

Thanks. I think that's very sound advice. As you say, I need to get myself clued up to a level where I can gauge if an accountant knows what he's talking about, and there's not a lot about this sort of stuff to be found online.

I don't know if it would make any difference, but I could forgo being a director for the time being, so it wouldn't be an employee-employer relationship, but, presumably, a sole trader - client relationship. I don't know if that would make any difference to the tax situation?

[northernladuk]

Why would someone give you a significant stake in a company for just a few months work?

Are you sure you are looking at this from a purely business perspective and not getting giddy about it all.

Have you worked out what this would be worth to you in possible scenarios like them doing OK, struggling for years and the case of it going belly up in the near future?

We've had a couple of threads on being paid in shares not money and not one of them ended well. They were all giddy about the prospect of getting free money as well.

[Lance]

Thanks for your vote of confidence. Not to be out-gloomed, couldn't I incur a tax liability on receipt of shares then have it all go to zero afterwards and still owe the tax?

No.

Just get the shares value at £1 per share. As long as the valuiation of the company is fair then this is all fine.
If the business has no business without your input then it has no value anyway.

The tax you worry about is capital gains.

Of course you could use the other company's accountant to asnwer these. They do have one don't they?
Have you got legal advice?
What happens if it does go belly up? Who owns what?
What if a co-director dies? Who owns what?
How many shares will you have? What is in place to ensure that you don't get your share owenership diluted to pretty much zero value after you've worked for free?
What class of shares are you getting?
Are you going to be a fully signed up dircetor or a director in name only?

The tax on the shares is the least of your worries. If you had an accountant he'd tell youi this.

[WordIsBond]

Thanks. I think that's very sound advice. As you say, I need to get myself clued up to a level where I can gauge if an accountant knows what he's talking about, and there's not a lot about this sort of stuff to be found online.

I don't know if it would make any difference, but I could forgo being a director for the time being, so it wouldn't be an employee-employer relationship, but, presumably, a sole trader - client relationship. I don't know if that would make any difference to the tax situation?

Not a lot of stuff online? Perhaps you haven't tried the right place.

I mentioned you could Google 'Company Valuations.' You could also try 'taxation of employment related securities'.

I guess you could do the sole trader thing but then it is profit and you have to pay NI and personal tax on it, and you can't take advantage of any of the tax reliefs for employees that might help you out. Maybe that doesn't matter because the valuation will be low enough that it doesn't matter, but in that case it probably won't matter either way.

Let's put some numbers out there. What's the annual revenue? EBITDA? Net Asset Value? Perhaps you could tell us what you mean by 'technical debt' -- is this real debt that really has to be paid or something that the company has a right to convert to equity, or something like that? And how big of a share are you getting?

[ittony]

Let's put some numbers out there. What's the annual revenue? EBITDA? Net Asset Value? Perhaps you could tell us what you mean by 'technical debt' -- is this real debt that really has to be paid or something that the company has a right to convert to equity, or something like that? And how big of a share are you getting?

Revenue 30k, EBITDA 20k. NAV 2k. It's a SaaS product which ticks over with minimal effort from current owner. There are no employees. The code is antiquated and and it's becoming very difficult to make even simple changes. Without a significant rewrite it's in imminent danger of losing customers or falling over completely, which it what I mean by 'technical debt' - a coders term for the amount of development work which needs doing. I would receive 35% for sorting it out.

[Lance]

Revenue 30k, EBITDA 20k. NAV 2k. It's a SaaS product which ticks over with minimal effort from current owner. There are no employees. The code is antiquated and and it's becoming very difficult to make even simple changes. Without a significant rewrite it's in imminent danger of losing customers or falling over completely, which it what I mean by 'technical debt' - a coders term for the amount of development work which needs doing. I would receive 35% for sorting it out.

sounds like you get £700 in assets and £7k of the profitability (caveat being thsat EBITDA can be misleading)
and the cost to you is, the amount of effort to fix it, plus the amount of ongoing effort to run it operationally.

If it's no more than 2 weeks effort to fix, and no more than 2 weeks a year to keep running then it's seems fair.

For me the reason I'd do it would be moer aropund the growth potential. If that was real though I can't help thinking the current owners would find a way to pay for the fix rather than give up over a third of the company.

[WordIsBond]

Revenue 30k, EBITDA 20k. NAV 2k. It's a SaaS product which ticks over with minimal effort from current owner. There are no employees. The code is antiquated and and it's becoming very difficult to make even simple changes. Without a significant rewrite it's in imminent danger of losing customers or falling over completely, which it what I mean by 'technical debt' - a coders term for the amount of development work which needs doing. I would receive 35% for sorting it out.

Sorry for being dumb on 'technical debt.'

NAV says you are getting £700, as Lance says. With that revenue and profit margin, someone might quibble at that. Earnings of £20K suggests a much higher value -- if that is maintained you get about £7K a year in dividends, not bad. For this kind of company a P/E ratio of 4 might be considered appropriate, which would value it at £80K, but given the uncertainties that's obviously too high -- consider half of that profit at risk and you are down to £40K. A common revenue multiplier is 2, but I've bought into very small companies like this at 1.5 times revenue. If you can make the case that half the revenue is at stake, then you could revenue value the company at £20-30K.

So NAV would say it is worth £2K, earnings suggests around £40-50K, revenue maybe £20-30. All told, if I were buying I might be willing to pay £25-30K, so 35% means maybe £8-10K

Talk to an accountant, but I wouldn't consider these values worth paying for a valuation. Just use a reasonable value and have your reasons ready if ever challenged.

[Lance]

Here’s a thought. If the technical debt can be quantified it could be used as a factor in the valuation.

[WordIsBond]

Here’s a thought. If the technical debt can be quantified it could be used as a factor in the valuation.

Clever idea. But the obvious way to quantify it is the cost of OP putting it right. And the opportunity cost of him putting it right is his normal daily rate for three months, or whatever. And if that's the value of the technical debt, then yes, it is offset against the current value of the company but HMRC could then argue that he is receiving shares in lieu of that amount, and therefore he should pay tax on that amount. I wouldn't call that exactly fair and appropriate of them but it's HMRC.