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.
- 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.