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How To Give Away Shares In Your Business

Photo by Community Friend

Photo by Community Friend

You might want to give someone shares in your business because they’re going to invest money. You might want to give someone equity because you want them to work in your business, or to motivate someone who already works there.

Getting an equity investment is a great way to get money into your business, because it helps cash flow. Unlike a bank loan, you don’t have to pay it back, so it doesn’t drain your bank account just when you need the money to build the company up. I’ve talked before about how to give someone equity to get them to work for you, often for free, and I’ll write something soon about why you might not want to give shares to employees.

Issuing shares to an investor

There are a few things you need to think about here. If you’re thinking about issuing shares to an investor, you need to think this through really carefully. Remember that, unlike a bank loan, equity is forever. You’re probably going to have that investor for the rest of the life of your company. Sure, in the future, you might buy the shares back, or the investor might sell their shares to someone else, but if you are the owner of a 1-50 employee type company, my experience shows that the investor is probably going to be around forever.

So remember that every time you pay yourself a dividend from the company, you’ll be paying that dividend to the investor as well. If you have 80% of the shares, and Ms Investor has 20%, and you have 100k of net profit to be issued as dividends at the end of the year, you’ll be paying her 20k. Every year. And she doesn’t have to do anything to earn that money. I’m not saying that this is a bad idea; I’m just saying that you have to be aware of this right from the beginning.

So do spend a little time getting to know your investor, what her motivations are, and working out if the investment is worth it for you.

Friends and family investors

Here’s a special note if you’re thinking about giving shares to friends and family. It’s very common to get investment in this way but be aware that your family may still see this as a loan and there may be an emotional price tag to the money. Will you always have to watch what they want on TV at Christmas if you take their money, or will they feel entitled to lecture you about the business because they invested 20k?

Get it all written down

Get a shareholders’ agreement when you issue shares. I can’t emphasise this enough, and have been known to jump up and down and stamp my little feet with clients who don’t think this is necessary. A shareholders’ agreement will make it very clear how it all works and what the expectations are on both sides. It will protect both of you. Ideally, get a good commercial lawyer to draw this up for you, but if you can’t afford this, then at least get one from Netlawman or another online legal docs company. For 35 quid, and an hour’s work, I promise you this will save you headaches in years to come.

How to actually issue the shares

Check that your memorandum and articles allow you to issue the shares, and how many shares you have already. If you only have 1 share, you might have to issue more in order to give 20% of your company to someone else. Fill out form SH01 with Companies House so they can keep a record of the shares. You don’t need a share certificate or anything 18th century – it’s what’s on record at Companies House that counts.

For all the boring stuff, Business Link has a good guide. My advice though is to get your accountant to do all the boring stuff for you. They like that sort of thing, and should do it properly. They can also go through the tax implications for you.

Tax things to think about when issuing shares

This really depends on whether the shares you’re selling are worth anything. If you’re a new start up, or haven’t got any sales yet, the shares are probably not worth anything, so there are no real tax implications. Don’t quote me on this; it’s up to you to check this out your own situation.

If you’re further down the road, or you’ve spent a lot of money on setting up the business, the shares could be worth money. So you need to speak to HMRC to see what they think. They want to know if you’ve given your investor something for nothing.

HMRC’s thinking goes like this:

  • The company gives the investor shares worth (on paper) 500k in exchange for 100k of cash. So (on paper) the investor has made 400k. So HMRC want to tax them on the 400k they’ve just made. They want their piece of the pie.

You don’t want to lumber your investor with a fat tax bill, so it’s best to be really clear about this beforehand, and this is where an experienced accountant is really worth their sausages.

Summing up

  • Think things through
  • Keep it simple wherever possible
  • Get a shareholders’ agreement or I’ll come round and shout at you
  • Make your accountant do all the boring stuff and check out the tax implications with HMRC first

If you’d like some help to make a decision about whether an equity investment is the best route for you, and maybe to look at the options for getting cash into your business, then do get in touch. I won’t do the boring bits for you, but I can help you make the right choice.

Julia Chanteray

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    5 comments to How To Give Away Shares In Your Business

    • Lynn Sieber

      I own a company. We have been in business 5 years. I have equity investors and I own 51% of the company. I run and manage it. We are not super profitable but we have a good reputation and it could easily grow with the right manager. My husband is looking at a job overseas and I want to get out of the business. We have a loan on the business. I would like to give away the business if someone could continue to pay on the loan. The business has no problems making the low interest bank loan payment each month. How do I find the right person to give it to without making public announcements?

    • Without knowing your direct circumstances, it’s difficult to advise, but you could look at passing the business over to one of the equity investors, or seeing if they know people who would be interested in taking it on. Businesses are often bought and sold within a network of people, without advertising it widely, so it can be good to just put the word out that you’re interested in moving on. Your husband’s new job is a good excuse, so it doesn’t look like you’re getting out because the business is failing.
      If you’d like me to have a look in more detail at what your approach would be, I’d be happy to schedule one of my decision making sessions, which I often use for people who are faced with situations like this. It’s a much more cost effective solution than a lawyer or a big accountancy consultancy firm.
      Good luck

    • Rich

      Hello ,

      How do i evaluate the worth of my company’s share as i am about to bring in share holders (friends/family) who would also be a part of the day to day running of the business?. The major physical access i currently have are the equipment i use for the business and a website

    • Hi Rich
      The value of any company (and shares in that company) is really what someone is willing to pay for it. Your accountant might be interested in equipment and your website, but that’s just so she can depreciate them in the accounts, they’re not that relevant for investment purposes. If you’d like some help in working out how to bring in some investment and remunerate your investors through shares, dividends and maybe even paying them a salary, do book in for a decision making session and I can talk you through it

    What do you think?




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