Reply to: Rearranging shareholdings

[WordIsBond]

The question is still whether there is any real value in the company. If there are no retained funds, is there a product? If not, then the profit is coming from the personal services of the directors, presumably, in which case it wouldn't be hard to argue that the company itself has no real value.

If there's a product, there's value. Then you get into employment related shares, as Martin has said, and it gets complex.

[northernladuk]

Just because they didn't post back doesn't mean it didn't work for them! Maybe they're all larging it up in the Seychelles with their millions and have no need to post here any more.

Maybe.

This is true although we have had feedback from a few where it fell apart. So that's a couple of failures, a couple of silences and not one post to say it worked well for them. Not cast in stone but is evidence of a trend of what people generally think anyway.

[Paralytic]

My money will be number 5 all day long.

From what I remember, every single post about working for equity in the company has failed to produce a penny for the contractor.

Just because they didn't post back doesn't mean it didn't work for them! Maybe they're all larging it up in the Seychelles with their millions and have no need to post here any more.

Maybe.

[northernladuk]

My money will be number 5 all day long.

From what I remember, every single post about working for equity in the company has failed to produce a penny for the contractor.

[ContrataxLtd]

Tom and Dick have 70 and 30 of 100 shares respectively. They want to get Harry on board and rearrange things so that Tom has 55%, Dick has 25% and Harry has 20%. How can this be achieved?

They can't just issue Harry with 25 new shares (giving him 25/125 = 20% of the business) because this would leave Tom with 56% and Dick with 24%. Would new shares have to be issued to all three of them in order to get the percentages exactly as required, and if so would Tom and Dick have to pay tax on these even though their stake in percentage terms was decreasing?

Getting the shares to Harry is the easy part, Tom & Dick transfer some shares to Harry or the company issue shares to all three parties to achieve the desired split going forward. The hard part comes from looking at how to do this is the most efficient manner for all parties considering:

1. Capital gains tax on the transfer to Harry - possible holdover relief here;
2. Value Shifting implications if new shares are issues - again tax on Tom & Dick
3. Employment related securities issues - more relevant in issuing shares but still to be considered
4. An iron clad shareholders agreement to cover all parties
5. Plenty of luck to ensure the working relationship doesn't go sour

You won't get answers to the above without paying for professional advice and that will cost a reasonable amount to ensure it is done properly.

Martin
Contratax Ltd

[ittony]

Sounds like it's more well thought out than it seemed at the start.
Why not have the share method sorted out when the shareholder agreement is done? Presumably that's being done by a solicitor who knows all these things?

Oh. And good luck. I urge caution as I've seen too many of these go wrong.

Thanks. Your cautioning is well taken. It is a bit of a worry.

[ittony]

you misunderstand the accountants relationship to jam as well.

I'm hardly under any illusion on that front. Here I am with a simply stated question, at level which were it to be about computing I could ask on Stackoverflow and get a host of useful answers, but because it's about accountancy it's like getting blood out of a stone.

[Lance]

Yes, this would all be tied up in a Shareholders Agreement.



There is also the possibility that none of them are idiots and all of them are well intentioned. And yes, I'm aware that the road to hell is so paved, but nevertheless.

I was really only after some advice on the mechanics of changing the shareholding percentages, rather than the prudence of the entire venture.

Sounds like it's more well thought out than it seemed at the start.
Why not have the share method sorted out when the shareholder agreement is done? Presumably that's being done by a solicitor who knows all these things?

Oh. And good luck. I urge caution as I've seen too many of these go wrong.

[Lance]

No. It's nothing so convoluted or devious at that. I would be going into business with an established company and receiving shares on the understanding that I'd do a big piece of redevelopment work up front and have an ongoing involvement in the business. I could forfeit some of the shares if I left, under a bad leaver clause.

these discussion usually end up at the same point.
If it's a profitable business why would they give you some of it rather than pay you for the work?
If it's completely open and honest then the only reason is because it costs them less to give you shares than to pay you.
Or they expect to have much greater need of you later, and if you have shares you have skin in the game.

Either way, and still assuming honesty, you need legal help. If this works out you'll be there for the long term. Are they ever going to pay you a wage, or are you doing all the work for just 20% of the profit?
What happens if Tom dies?
What happens if Dick shags Tom's wife and they fall out?
What if the company runs out of cash and you're expected to put your hand in your pocket?

All this, and more, needs thought and legal paperwork. And that's for an honest relationship.

[ittony]

Does Harry realise that with just 20% of the shares, Tom and Dick can simply increase the number of shares in the business and effectively dilute Harry as low as they desire? This is legal, and common. Only a rigid contract can prevent this.

Yes, this would all be tied up in a Shareholders Agreement.

All I can think is there are two scenarios here.

1. Tom and Dick are trying to get loads of free work from Harry. Tom and Dick are smart. Harry is an idiot.

2. Tom and Dick are idiots. Harry doesn’t realise this so is contemplating working with them.

There’s no way near enough detail to make any better informed decisions.
If Harry is smart he’ll either walk away or seek professional legal advice.

There is also the possibility that none of them are idiots and all of them are well intentioned. And yes, I'm aware that the road to hell is so paved, but nevertheless.

I was really only after some advice on the mechanics of changing the shareholding percentages, rather than the prudence of the entire venture.

[Lance]

No, I misunderstood your enigmatic Wikipedia link to imply I wanted jam today from an accountant.

you misunderstand the accountants relationship to jam as well.
They tell you much jam you have, how much you owe to the jam fiends at HMRC, and they take some of jam to fund this.

Jam is money.

[ittony]

OK, so I’m trying to understand the convoluted story. Tell me which bits are wrong:
1. You’ve been offered some work for a company
2. You (or they) have come up with a plan to temporarily give you shares in the company.
3. You get paid dividends, rather than being paid as a salary or a contract rate.
4. The dividends do not go to an umbrella or Ltd, but directly into your personal account.
5. When the work finishes, so does your shareholding in the company.

There’s no contract, no insurance, no work-related pay.

Am I close?

No. It's nothing so convoluted or devious at that. I would be going into business with an established company and receiving shares on the understanding that I'd do a big piece of redevelopment work up front and have an ongoing involvement in the business. I could forfeit some of the shares if I left, under a bad leaver clause.

[ittony]

You’re the one working for jam....
You’re doing work for no pay, but expect shares in lieu of payment.
Or have I misunderstood?

No, I misunderstood your enigmatic Wikipedia link to imply I wanted jam today from an accountant.

[Paralytic]

Does Harry realise that with just 20% of the shares, Tom and Dick can simply increase the number of shares in the business and effectively dilute Harry as low as they desire? This is legal, and common. Only a rigid contract can prevent this.

Harry should definitely read the articles of association and any shareholder agreements for the company. If Harry doesn't know he should do this, Harry should just as for a payment method that would not potentially be seen as tax avoidance.

[Lance]

Does Harry realise that with just 20% of the shares, Tom and Dick can simply increase the number of shares in the business and effectively dilute Harry as low as they desire? This is legal, and common. Only a rigid contract can prevent this.