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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

When you want to grow your business, you often need money. Maybe you need money to buy new stock, do some marketing, employ new staff, do some more things.  The banks are reluctant to lend to you, because your balance sheet is looking a bit weak, or you haven’t got enough money yourself to match their lending.  So you want to get some cash from an investor, in return for a share in the business.

An investor is effectively buying equity on the basis that if they give you some cash now, eventually their share of the business will be worth much more.  So if someone were to invest, say, 50k in your business, they’ll probably be thinking that they’ll want to get between 75 and 100k back in 3 – 5 years time.  A better return for them than putting their money in the bank, especially with today’s laughable interest rates, but much more risky.

Things to ask yourself are:

• Do you want to end up with a smaller slice of a big pie, or a big slice of a tiny pie? My experience is that the business owner always wants to keep as much of the business for themselves as possible, but this isn’t always sensible, as a lack of cash in the business means that you’ll always have a little pie.
• What are the strings attached to the cash? If you’re getting money from friends or family, or from an investor who has previously run a business, there can be the danger that they’ll interfere with how you run the business.
• On Dragons Den, people are always looking for the dragon who can bring contacts, or experience into the business, giving you a boost as well as the cash. In real life, this is pretty rare, so you shouldn’t expect this from an investor.
• If you had 100k to invest in a company, would you invest in your company? What’s the likelihood that they’ll get their money back? What’s the likelihood that you’ll all make millions? Think about it from their point of view.
• How will they get their money back? It’s all very well to own part of a business that’s worth a million, but the investor wants to be able to spend that money in 3 years time. Think carefully about what they’ll eventually get back in terms of hard cash.

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 (more…)

There’s a new investment fund  – no, not one of these government schemes that are exactly the same as the old government schemes, but something that might be genuinely useful (maybe.)

It’s aimed at women business owners, so if you’re female already, then you’re off to a flying start.  If you’re male, don’t worry because you can team up with a lovely woman and still take advantage.

The Aspire fund is for businesses which are already on track with getting equity investment from an angel investor.  The Aspire fund will match the equity investment from your angel, as long as this is between £100k and £1m.  They won’t just give you the money though.  You knew there was a catch, didn’t you. They will want the same amount of equity as your investor, so you need to be able to give away more shares.

I would use this as a way of encouraging an investor to come on board, because they only need to put in half the money, if the Aspire fund will match them.

As this is a government scheme, there’s a whole bunch of hoops which you need to jump through, and word on the street is that the scheme has been launched without any procedure for getting people through it, but don’t let this put you off.

As usual, if you need help in putting an investment package together, it’s much easier if you have professional help to do this – so you’ll remember where to come, won’t you.

It has become more and more difficult to raise money for your business in recent months and I’m spending more of my time helping people to get the investment they need to take their business to the next stage.  I’m noticing some big changes in the investment environment, so I thought I’d pass these on.

Banks – At the moment, the banks don’t know where they are.  Frontline staff are being given different targets, and different instructions every week, so all the rules are being rewritten, and then written again. I’m finding that the bank staff are being overruled by lending departments, and that even if a loan is agreed in principle, this can be changed a few weeks later.  Frustrating for them, and even more irritating for the business.

What to learn from this – always have a back up plan about where you’re going to find the money.  Talk to several banks, be able to come up with some matching cash and don’t expect to do a deal quickly or easily.

Angel investors – The amount of money being invested by business angels has gone down recently.  Partly this is because less small companies are being sold to bigger companies or going for floatation, so the serial investors aren’t getting their money back to invest in more companies, and partly it’s because everyone’s too scared to do anything and is waiting to see what everyone else is doing.  However, there is still money out there, and with interest rates going so very low, I’m guessing that investors will be unlikely to keep their money in a bank for 3% interest.  They might even see investing in small businesses as a safer investment than, say, Royal Bank of Scotland.

What to learn from this – consider bringing in an angel investor, maybe as part of a deal, where the angel money entices the bank to lend.  Try flirting with several angels at once to make sure someone is really going to get into bed with you.