Giving shares and equity away

I’ve been working with a couple of clients recently on how to give equity to other people coming into the business, and it’s definitely a recurring theme which causes a lot of debate and difficulty.

Sometimes people have to decide who gets what at the start of a business, but more frequently the issue comes up when there’s an existing enterprise and the owners want to bring someone else in.

You might want to bring someone else in because you’ve found someone who can help you with the business.  Sometimes, that someone is me, so I might provide advice and support in return for a share in the business rather than my usual cash fee.  More often, I’m advising someone who has a business which is doing okay, but the existing business owners just don’t have enough time or the skills to do the thing which are needed to push the business to the next step.  Sometimes the business has outgrown the original owner, or you just need an extra pair of hands on board, and you can’t afford to pay the high salary that someone really good would need.

Or you might want someone with a lot of talent and experience, and want them to stay around for a while and be really motivated to work on the business.  This was why I went to work for a web hosting company as Operations Director 10 years ago – they needed someone who would work really hard to grow the business, and I wanted a share of the business because I was fed up of working for a salary and making money for other people.

Whatever your reasons, if you’re going to bring someone in to work for the company in return for equity, here are some areas to think about

• How much of the company are you prepared to give away? And if you’re going to give away further shares in the future, to other people and investors, how much are you going to end up with?
• If you give them a chunk of shares up front – what’s to stop them walking away or not bothering to do any real work? It’s usually better to agree to give someone shares gradually, up to a certain limit, and make the shares contingent on them doing some stuff in the business.
• You want to make it very clear what they are expected to do in the business. If you want them to raise investment, be clear about your timescales for this, and if you want them to be in charge of marketing, make sure that they know exactly what this means. I saw a company recently where someone had been brought in to do marketing, given a chunk of equity, and then all they did was write a plan for what they thought the original owner would do.
• What happens if you fall out? Remember that they might seem like the best person in the world at the moment, but people do fall out in business, no matter how well they get on at the beginning. Being in business with someone is like getting married, but it’s easier to get the equivalent of a pre-nuptial agreement.
• Do you need to pay them a salary as well as the shares?
• How much day to day control of the company are they going to have? Are they going to be a director, or just called the sales director? Who is going to be boss – lots of entrepreneurs take the brave step of recognising that as the company grows, they need someone with more experience to be the Managing Director or CEO and they give up being the boss. This is very hard to do, but usually works out really well.

If I can give you one piece of advice, if you’re thinking of bringing in someone to work for your business in return for shares (besides coming and talking to me about it first, of course) it would be:

GET A SHAREHOLDERS AGREEMENT!!

I have seen too many business tragedies where things have gone wrong in an unexpected way, and there has been no clear shareholders agreement to say what should happen in the different circumstances.  One of the most heart rending situations I’ve been involved in is where the minority shareholder died, and his wife then inherited his shares.  The company then lost a key member of staff (and a friend) and the shares were held by someone who the original business owner had only met once.

A shareholders agreement will protect everyone, and make it very clear how things are to be handled.  It’s expensive, and a nuisance – but you really, really don’t want to be without one.

This entry was posted on Wednesday, April 1st, 2009 at 5:38 pm and is filed under Uncategorized, equity. You can follow any comments to this entry through the RSS 2.0 feed. You can comment, or trackback from your own site.