I work a lot with business owners on giving shares and equity away to other people coming into the business. It’s a recurring theme which causes a lot of debate and difficulty.
Why would you give shares to a member of staff?
You might want to bring someone else in because you’ve found someone who can help you with the business.
Maybe you don’t have enough time or the skills to do the thing which is needed to push the business to the next step. Maybe you need someone with extra experience to help push the company into the next level.
Bringing someone in to help you grow the business, in return for you giving shares and equity away, can be a good strategy here, if it’s handled right.
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 motivated to work on the business. This was why I was brought in to a web hosting company as Operations Director 20 years ago. And why I insisted on them issuing shares when I joined the company.
They needed someone who would work hard to grow the business, and I wanted a share of the business because I was fed up with working for a salary and making money for other people.
Or you’re giving shares to someone in return for investment
Your company might need an injection of cash to help it to grow. Maybe you want to hire some new staff, invest in marketing, or open an office in Berlin to look after your European customers. Giving shares to an investor will give you a chance to bring in some much-needed money to expand the business.
I spend a lot of my time helping businesses to negotiate with a potential investor, and making sure that they structure the deal correctly and don’t give away too much of the company. And that they’ve properly thought through the implications before they get around to issuing the shares.
What about issuing shares to my wife or husband?
There are two main reasons you would think about issuing shares to your wife, husband or partner.
The first is that they’re involved in the business, and are already effectively your business partner. You missed out on giving them shares when you first set the company up, and you want to put that right now.
The second reason for issuing shares to your wife or husband is when they earn a lot less than you do, and you want to take advantage of their tax allowance. This way you can pay more money out of the company in dividends (and maybe when you sell the company) without having to give so much to the taxman.
A good accountant can advise you on how to go about it within the law, and how you can pay your partner without getting into trouble. Don’t just go issuing the shares without checking with a reputable accountant, as this is an area that HMRC regularly chases people for if they think you’ve been too greedy or generous to your partner.
Here are some areas to think about if you’re thinking about giving shares and equity away
- How much of the company are you giving to someone else? And if you end up giving shares again in the future, to other people and investors, how much are you going to end up with?
- When issuing a chunk of shares up front, be careful. What’s to stop them walking away or not bothering to do any real work? It’s usually better to agree on giving shares gradually, up to an agreed 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 bring in investment, be clear about your timescales for this. 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 to think about when issuing shares to a key member of staff
- 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 prenuptial agreement. That’s the shareholder agreement I talk about below.
- Do you need to pay the employee a salary as well as the shares? After all, they’ve still got to eat and pay rent. How much will that salary be, and will it be less than they might expect to earn in a regular job? Giving shares to someone often means that they will agree to work for you for less than their market rate, but it doesn’t imply they can work for free.
- Are they going to be a director, or just called the sales director? Being a company director is completely separate from having shares in the company, and has added responsibilities and legal rights
- Who is going to be the 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. This is very hard to do but usually works out well. You might bring someone in to take over from you as the MD, giving them shares to incentivise them and then gradually step back from the company.
The most important thing if you’re giving shares and equity away
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 don’t want to be without one.
Would you like to talk this through some more?
When people want some one-off advice on their strategy for giving shares and equity away in their business, they often book one of my decision-making sessions, by Skype or in person if you’re in Brighton.
Let’s talk about giving shares and equity away
Here’s how to do that…
If you’re seriously thinking about issuing shares to someone else and would like some help with working out how to move forward.
Other helpful articles about how to give shares to others
You might want to also read these articles issuing shares in your business:
How to give shares in your business (lots of great tips on the practical elements of this in this article)