Shareholding offer by client

[SouthernContractor]

I'm a self employed contractor, operating through my own limited company. I've been engaged full time on various contracts for many years and am in the middle of a major contract presently.

My present client has offered me a small (5%) shareholding in his company.

Because they can't afford to pay me on salary, only on a project basis, with the costs built into the project, this is as a means to retain my loyalty to his business as he tries to grow into providing management consulting and technology leadership type professional services (this is what I do). This is also to try and minimise the likelihood of my working for a competitor.

Right now the shareholding isn't worth a great deal as the business was recently subjected to a management buyout via loan notes offered by the original business owner. As the loans are paid and turnover, so the share value will increase. The shares will probably be worth something meaningful in 5 years or so.

The shares would also come with conditions attached. Based on a set of rules which essentially state that employees who leave to work for a competitor will forfeit their shares.

There are upsides and downsides to my business. On balance, I can mostly see downsides. These include:

1. Deal would limit my ability to trade with anyone other than my current client.

a. Other parties less likely to offer me work.

b. Could have serious financial impact to my business that would quickly wipe out any benefit of share value increase.

2. Deal will be viewed badly by HMRC.

a. Good/Bad leaver concept cannot be applied to my business. I cannot be their employee.

b. Risk HMRC will come after my company under IR35.

There are opportunities/upsides:
1. Partner industry leading business
2. Increase my industry profile
3. Gain access to new network of senior industry contacts

So, what do people think about this?

Is there a deal to be done or will it compromise my business to the extent that HMRC will cry IR35 and/or limit my ability to find work?

[BrilloPad]

A friend was offered 0.6% of a business to work for the. He assumed the business *might* be worth £20m in 5 years.

They got bought out for £100m after a year.

I know this does not answer for HMRC/competitor questions. But remember you *might* get a huge upside very quickly.

[northernladuk]

I'm a self employed contractor, operating through my own limited company. I've been engaged full time on various contracts for many years and am in the middle of a major contract presently.

My present client has offered me a small (5%) shareholding in his company.

Because they can't afford to pay me on salary, only on a project basis, with the costs built into the project, this is as a means to retain my loyalty to his business as he tries to grow into providing management consulting and technology leadership type professional services (this is what I do). This is also to try and minimise the likelihood of my working for a competitor.

Right now the shareholding isn't worth a great deal as the business was recently subjected to a management buyout via loan notes offered by the original business owner. As the loans are paid and turnover, so the share value will increase. The shares will probably be worth something meaningful in 5 years or so.

The shares would also come with conditions attached. Based on a set of rules which essentially state that employees who leave to work for a competitor will forfeit their shares.

There are upsides and downsides to my business. On balance, I can mostly see downsides. These include:

1. Deal would limit my ability to trade with anyone other than my current client.

a. Other parties less likely to offer me work.

b. Could have serious financial impact to my business that would quickly wipe out any benefit of share value increase.

2. Deal will be viewed badly by HMRC.

a. Good/Bad leaver concept cannot be applied to my business. I cannot be their employee.

b. Risk HMRC will come after my company under IR35.

There are opportunities/upsides:
1. Partner industry leading business
2. Increase my industry profile
3. Gain access to new network of senior industry contacts

So, what do people think about this?

Is there a deal to be done or will it compromise my business to the extent that HMRC will cry IR35 and/or limit my ability to find work?

I think you need to understand what you are better before making any decisions like this.

IMO only you know if this company is going to take off or not so almost impossible for us to decide for you but this set up just isn't for me. I'm quite happy doing what I do and the extra risk of the shares just isn't worth it for me. I'd be out of there and on to a client that can pay pretty sharpish.. But again, that's based on my personal appetite for risk...

[clearedforlanding]

I'm a self employed contractor, operating through my own limited company. I've been engaged full time on various contracts for many years and am in the middle of a major contract presently.

My present client has offered me a small (5%) shareholding in his company.

Because they can't afford to pay me on salary, only on a project basis, with the costs built into the project, this is as a means to retain my loyalty to his business as he tries to grow into providing management consulting and technology leadership type professional services (this is what I do). This is also to try and minimise the likelihood of my working for a competitor.

Right now the shareholding isn't worth a great deal as the business was recently subjected to a management buyout via loan notes offered by the original business owner. As the loans are paid and turnover, so the share value will increase. The shares will probably be worth something meaningful in 5 years or so.

The shares would also come with conditions attached. Based on a set of rules which essentially state that employees who leave to work for a competitor will forfeit their shares.

There are upsides and downsides to my business. On balance, I can mostly see downsides. These include:

1. Deal would limit my ability to trade with anyone other than my current client.

a. Other parties less likely to offer me work.

b. Could have serious financial impact to my business that would quickly wipe out any benefit of share value increase.

2. Deal will be viewed badly by HMRC.

a. Good/Bad leaver concept cannot be applied to my business. I cannot be their employee.

b. Risk HMRC will come after my company under IR35.

There are opportunities/upsides:
1. Partner industry leading business
2. Increase my industry profile
3. Gain access to new network of senior industry contacts

So, what do people think about this?

Is there a deal to be done or will it compromise my business to the extent that HMRC will cry IR35 and/or limit my ability to find work?

5% is a very small slice of the pie for the risk you are taking unless you have found a unicorn.

• What is your current valuation of the company?
• What do you value the time you put in at?

Do some simple maths.

"The shares will probably be worth something meaningful in 5 years or so." - you are not at William Hill.

* "management consulting and technology leadership type professional services" - eh? How the hell can he not afford to pay you anything, does he not have any clients? This is one area where you are so busy invoicing you don't have time to deliver anything.

[Eirikur]

Do a full company check. Get insight in all their finances, current orders and prospects. Do they pay dividend?

[WordIsBond]

There are upsides and downsides to my business. On balance, I can mostly see downsides. These include:

1. Deal would limit my ability to trade with anyone other than my current client.

a. Other parties less likely to offer me work.

b. Could have serious financial impact to my business that would quickly wipe out any benefit of share value increase.

2. Deal will be viewed badly by HMRC.

a. Good/Bad leaver concept cannot be applied to my business. I cannot be their employee.

b. Risk HMRC will come after my company under IR35.

There are opportunities/upsides:
1. Partner industry leading business
2. Increase my industry profile
3. Gain access to new network of senior industry contacts

So, what do people think about this?

Is there a deal to be done or will it compromise my business to the extent that HMRC will cry IR35 and/or limit my ability to find work?

This is the way to go about it, evaluating and weighting upsides and downsides. Can any of those be shifted?

For instance, how do you know other parties are less likely to offer you work? Does others have to know you own the shares?

Can you negotiate on the leaving part of it? He wants to keep you around. Can you keep your 5% if you work for him for a year or two and then stay available on a part time basis (say 2-3 days a month) after that? That allows you to go make money somewhere else and still keep your stake, with an incentive to help him grow. And if you have other clients, that would make it hard for them to argue this is employment.

Lots of businesses acquire shares as part of compensation for services rendered. They don't lose their shares, though, when they stop rendering those services. So there is no real problem with the shares, it is the loss of them on leaving that seems IR35 dangerous. If you can negotiate different terms, you might have something workable.

Biggest problem here is it sounds like he wants to own you, so IR35 problems are likely to keep coming up, and if you are ever investigated he'd probably say some unfortunate / unhelpful things when HMRC shows up and starts asking leading questions.

[SouthernContractor]

Thanks for everyone's thoughts on this. Many good perspectives, which have brought clarity to my own thoughts.

I've looked at the valuation of the business. It's not huge money and my assessment is that it's unlikely to grow significantly. The business is not paying dividends until the owners loan notes are repaid somewhere around 2020. I'll have to work with other clients between now and then which would probably result in forfeit of the shares. So, the shares mean little to me as a contractor unless the business is bought (which seems unlikely). Of course for salaried employees who hold management positions, company shares are far more meaningful.

The share offer is meant to encourage preference to my client. To attract quality talent without making the financial commitment and taking the risk associated with offering a salaried executive role. To present me as an employee and restrict the likelihood of my working for competitors. This can only work if the shares offer real current value, with a good chance substantial future value. I'm not convinced it will grow substantially.

Also, with share ownership, this would only increase and there would be an expectation that I would contribute my time freely to the business. This would wipe out any value the shareholding may offer.

The point made about conditions being attached to the shares is well taken.

I'll need to talk more with the owner about the realities of the deal. Perhaps look at reforming it as a business to business deal, without restrictions on my business activities.

Even if a workable deal could be fashioned, ultimately, it feels like the downsides are too great and the share offering not valuable enough to make it worth my while.

[clearedforlanding]

Thanks for everyone's thoughts on this. Many good perspectives, which have brought clarity to my own thoughts.

I've looked at the valuation of the business. It's not huge money and my assessment is that it's unlikely to grow significantly. The business is not paying dividends until the owners loan notes are repaid somewhere around 2020. I'll have to work with other clients between now and then which would probably result in forfeit of the shares. So, the shares mean little to me as a contractor unless the business is bought (which seems unlikely). Of course for salaried employees who hold management positions, company shares are far more meaningful.

The share offer is meant to encourage preference to my client. To attract quality talent without making the financial commitment and taking the risk associated with offering a salaried executive role. To present me as an employee and restrict the likelihood of my working for competitors. This can only work if the shares offer real current value, with a good chance substantial future value. I'm not convinced it will grow substantially.

Also, with share ownership, this would only increase and there would be an expectation that I would contribute my time freely to the business. This would wipe out any value the shareholding may offer.

The point made about conditions being attached to the shares is well taken.

I'll need to talk more with the owner about the realities of the deal. Perhaps look at reforming it as a business to business deal, without restrictions on my business activities.

Even if a workable deal could be fashioned, ultimately, it feels like the downsides are too great and the share offering not valuable enough to make it worth my while.

Sounds like a good call.

[BlasterBates]

Here is the reality:

Startup Business Failure Rate By Industry | Statistic Brain

70% of businesses have failed after 10 years.

Of the remaining 30% I would imagine quite a few are struggling.

[MrMarkyMark]

Can't say whether it is worth a punt, or not and cannot add to what has already been said.

but....this bit is the deal breaker for me:-

I'll have to work with other clients between now and then which would probably result in forfeit of the shares.