Receiving shares in lieu of a salary?

[xchaotic]

A friend is about to employ someone and with his small Ltd being strapped for cash, they've both agreed for some equity in the company instead.

How should this be handled, can the contract say that he is receiving this and this amount of money and this and this amount of shares each year?
Ideally Friend 1 want's to part with equity gradually - i.e after 1st year only part with 5% of the company etc and perhaps renegotiate after.
If Friend 1 withdraw x amount of dividends that year, this also means that Friend 2 get 5% of that amount too.
Anything to look out of in particular?
Any easy way to agree on the valuation? Let's say that the company is bringing in £80k per annum and thanks to Friends help will bring potentially up to 150k.
This helps when calculating salary/divis for this year, but not much in how much of a stake should Friend 2 get? There are existing business connections, retained capital etc how is this usually valued?
Finally will they still be friends in two years time ? I know them both personally, they're good lads, but I fear such arrangements tend to break things... any tips on how to structure this so this is avoided? For example, Friend 2 receiving only 5% is much less exposed to the risk, perhaps it's better to structure his salary so that part of it is a bonus dependent on the performance of the Ltd?

Any tips from anonymous not lawyers and lawyers alike are warmly welcome.

[SueEllen]

A friend is about to employ someone and with his small Ltd being strapped for cash, they've both agreed for some equity in the company instead.

Employ someone as an employee? National Minimum Wage legislation would get in the way. Could end up causing problems in the long run particularly if the "someone" only has that work as his only source of income.

Plus even if the "friend" did promise the "someone" wages there are potentially other employment law issues as he can't afford to pay the "someone".

Use someones services as a sub-contractor? Fine.

How should this be handled, can the contract say that he is receiving this and this amount of money and this and this amount of shares each year?
Ideally Friend 1 want's to part with equity gradually - i.e after 1st year only part with 5% of the company etc and perhaps renegotiate after.

Then put it in the contract for services.

If Friend 1 withdraw x amount of dividends that year, this also means that Friend 2 get 5% of that amount too.
Anything to look out of in particular?

Not necessarily. A company can have different share classes.

For example if "friend" was sneaky he could do 2 types of share classes then give "someone" x% of type C shares which only get a sum every year.

Any easy way to agree on the valuation? Let's say that the company is bringing in £80k per annum and thanks to Friends help will bring potentially up to 150k.
This helps when calculating salary/divis for this year, but not much in how much of a stake should Friend 2 get? There are existing business connections, retained capital etc how is this usually valued?

You need to more research on that.

Finally will they still be friends in two years time ? I know them both personally, they're good lads, but I fear such arrangements tend to break things... any tips on how to structure this so this is avoided? For example, Friend 2 receiving only 5% is much less exposed to the risk, perhaps it's better to structure his salary so that part of it is a bonus dependent on the performance of the Ltd?
.

If you are going to "employ" or use the services of someone you know it's better to either:
1. Agree to pay them in the beginning a set sum at a particular date and have it in written form. Then pay them as you stated on time.
That way they know what they are getting but it can easily piss people off if you do really well and sum isn't equal to how much effort they put in.

2. Find someone who can help you for free and use them as an advisor but do the honest thing and give them honest compensation for their work. (It doesn't have to be money.) That way will be surprised at the payment and won't get pissed off as they expected nothing for their help.