Reply to: Shareholding offer by client

[Bluespider]

Wouldn't there be tax implications doing that?

They would be held as an asset by the Ltd. If sold at a profit, taxed accordingly. I think they would need some notional initial value so if you ever sold them at a lesser price they would reduce your taxible profit accordingly.

Could potentially be quite useful.

[MrMarkyMark]

If there had been some value to be had in the shares, couldn't they be issued to your ltd company rather than you as an individual. That way any caveats or forfeiture would be held in the Ltd. If you needed to operate elsewhere you could spin up another ltd company to deal with that, as you aren't the shareholder there is no legal ramifications on you working elsewhere.
Obviously the devil would be in the detail of the contract and only worth doing if there was real value in the shares.

Wouldn't there be tax implications doing that?

[Bluespider]

Based on the fact that there does not seem to be any value proposition either now or in the forseeable, I agree with the consensus.

But...

If there had been some value to be had in the shares, couldn't they be issued to your ltd company rather than you as an individual. That way any caveats or forfeiture would be held in the Ltd. If you needed to operate elsewhere you could spin up another ltd company to deal with that, as you aren't the shareholder there is no legal ramifications on you working elsewhere.
Obviously the devil would be in the detail of the contract and only worth doing if there was real value in the shares.

[northernladuk]

Sounds like a good outcome to me!

[MrMarkyMark]

Good choice, thanks for the update

[SouthernContractor]

I think we've reached a consensus. I can't really see the value proposition either. Much better to keep things as they are now. i.e. a simple, project linked, business to business relationship.

If I were to take on shares and tighten my links, it would limit my ability to do business as an independent contractor.

Even if I could sign up for the share offer with the forfeit conditions (which I don't think I could), the risk of share forfeit at some point in the future is high. As once there was a gap in contract work, I'd inevitably have to seek work with competitors in order to maintain income. I'd have to do this anyway at some point to maintain a mixed client base and remain squeaky clean on IR35. And would my clients competitors really want to work with me if I was a shareholder? No. So I'd increase the chance of ending up on the bench for longer.

Even if I managed to hang onto the shares and were able to cash them in (which may not be feasible) at £75K in five years, the risk losses to my business in the would probably cancel out the much of the share value.

I can't see any value to my business other than a bit more of a guarantee of long running contract work in the medium term. Which is always nice to have but then if you're doing a good job then people want to retain you anyway and if they don't have to work to do so, others will soon enough.

Thanks again guys.

[MrMarkyMark]

Well spotted Mark, we must all be blind.

I have reread the OP and I am really struggling to see any value proposition on the table.

Actually, to be fair, the sharp eyes of NLUK also spotted it and highlighted it in his quote.
In any case as it stands, I would be out.

Obviously if some things changed, I would have a look again.

[clearedforlanding]

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:-

Well spotted Mark, we must all be blind.

I have reread the OP and I am really struggling to see any value proposition on the table.

[jmo21]

if it's not worth anything now, and you can't see it being worth much in the future, then it seems like an easy answer to me.

Great idea for keeping permies around long term, vesting over years, on the hope that they will be worth lots.

Just doesn't fit for a contractor even if you would like a long-sh stay with them.

[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.

[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.

[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.

[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.

[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.

[Eirikur]

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