How to give away shares in your business

There are lots of reasons why you might want to give shares in your company to someone else.

You might want to give shares in your business to someone because they’re going to invest money and help you to make the company bigger and better.

Maybe you’re setting up a new limited company with someone else, and you want to give shares to them.

You might want to issue shares because you want a key person to come and work in your business. Or give shares to someone who already works there to make sure they’re motivated and want to stay for the long-term.

Here’s how to give shares in your business, without it becoming a major headache

When you issue shares to an investor, a business partner or an employee, this is a major decision and there are some important points to be sure of before you fill out the forms at Companies House.

This article takes you through those choices and gives you lots of other resources to dig into the detail to make sure you do this correctly.

It’s a longterm relationship

When I work with business owners on this, I often point out that to give shares to someone is a bit like getting married, because once you’ve done it, it’s difficult to get out of. In fact, when someone owns a part of your company, it’s more difficult to take this back than getting divorced.

You might think that you can buy them out, but in reality, this is unlikely. The value of your company will have increased once you decide that you don’t want that employee or investor any more, so you might not even be able to afford to buy them out.

And you’ll always need to keep cash in the company to keep growing, so the business will probably never be able to buy them out either. Don’t confuse your small business with the deals that go on in much bigger businesses. You don’t want to have the legal fees those big businesses pay out.

Do you really want to share all the money?

If you think that you might want to sell the business in a few years, remember that the person you give shares to will get a chunk of the sale price. That could be absolutely fine because their work or their investment might have helped you to grow the business much more than you could have done on your own, so you all end up with more money. But it’s something to bear in mind, especially if you’re tempted to give them a big chunk of the company early on.

Remember that you might have to pay out dividends from your profits to the person you give shares to as well. Most of us business owners use our dividends to pay our mortgage and put food on the table, so you have to be sure that there will be enough for everyone. There’s some good advice below about the different classes of shares which you definitely want to think about here.

So be 100% sure that this is the right thing to do. That’s why I encourage people to invest in a couple of hours of consultancy time with me, so we can be certain that they’ve made the right decision and they’re not going to regret it later.

It can be a great idea

When you give shares to an investor, it’s because they’re giving you money in return for the shares.

This is a great way to get money into your business because it builds up cash flow for you to be able to build up the company. Unlike a bank loan, you don’t have to pay the investor, because they’re getting the shares in return for the investment. They now own a part of your company.

When you’re setting up a new limited company with a business partner, they’re usually expecting to get shares in the new company. But you still want to make sure that you do this in the right way and that you protect both of you for the future.

And the decision to give shares to a new employee can definitely be a good idea. Especially if that new employee is a key person such as a new sales manager or very experienced technical person who you maybe couldn’t afford to pay at their usual market rate. You can maybe entice them away from their boring corporate job by giving them shares in your exciting fast growing business.

When you give shares in your company to reward them this is a great way to keep people motivated and make them feel that they’re part of the family.

Alternatives to just issuing shares

You don’t necessarily have to give shares to other people. A good proportion of the people I work with on this go for one of these alternatives.

You might want to have a profit-sharing scheme for staff, rather than give them shares. That’s a lot simpler to set up, and quite often staff would rather have a profit related bonus where they get some extra cash this year, rather than the idea of much more money in ten years time.

Your new employee might also prefer to work on a part salary, part profit share basis, rather than getting shares in your company. This can often be the case when she has children or a mortgage to pay for and needs the money sooner rather than later.

And if your company is already well established and making a good level of profit, you might want to think about using growth shares rather than ordinary shares.

Growth shares are where you give shares to someone, but the growth shares are a special sort of share where they only get dividends or the proceeds of the sale on the growth of the company after you gave them the shares.

How to be sure before you give shares to someone

When you want to give shares to an investor, a business partner or a senior member of staff you want to bring in, there are a few ways you can test things out to be sure.

When I work with clients on this, I often suggest that they employ their lovely new member of staff for a trial 3 or 6 months first. Then you can see how it all works out, and if they’re great you can issue the shares.

One of my clients did this with a manager she poached from the local company she was setting up in competition with, and they’re now 50:50 business partners in a very successful company.

You can back this up in the shareholders’ agreement as well, just to make sure that everything is covered.

If you adopt this, do make sure that you do get around to actually finalising the paperwork to issue the shares. I can’t stress this one enough, as I often see companies where an employee has been promised shares, but somehow they’ve never materialised.

This is one of those areas which can eat away at trust in the senior management team without you knowing about it, and should be avoided at all costs.

Do you all have similar values for the long term?

You might also want to have a serious discussion (or a series of serious discussions) about your values, how you think the business should be run, and what you think the long-term plan for the company should be.

This is a good idea to do before you give shares to staff or to an investor because you want to be sure that this is someone you can work within the long term. Here are some notes on the ups and downs of having a business partner, which also apply to anyone you might give shares to.

What happens if you just issue ordinary shares?

If you just issue ordinary shares to an investor, remember that every time you pay yourself a dividend from the company, you’ll be paying a similar dividend to the investor as well. You might not want to share out the dividends in this way, so you need to be clever about how you issue the shares.

If you issue shares which are the same kind of shares you have, ie, ordinary shares,  this is what can happen.

You have 80% of the shares, and you give shares to Ms Investor, so she has 20%. You get on with running the business, and you have 100k of net profit to be issued as dividends at the end of the year. Well done. But if you gave Ms Investor ordinary shares, you’ll be paying her 20k of that dividend. 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. Especially if Ms Investor is only going to give you 20k when you give her the shares in the first place.

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 in the long term.

How to issue different classes of shares

Your investor probably isn’t that bothered about getting a dividend every year. She’s probably more interested in having you give her shares so that she makes a lot of money when you sell the company.

If you give shares to an employee, they probably do want to get a dividend every year. Especially if you give them shares in return for working for you for less than their usual salary. But you still might not want to have to automatically give them a dividend according to how many shares you gave them. Or have to restrict your dividend to avoid paying them more than you want to.

You have the option to give different classes of shares. As the founder, you have A class shares, and you can give other people B class shares. The B class shares don’t have to have voting rights or the automatic right to a dividend, so this way protects you.

This is also pretty common when you’re gifting shares to your wife, husband or another family member, by the way.

Think about growth shares as an alternative

You might also want to think about issuing growth shares, which are a different kind of shares altogether. Growth shares are especially useful for companies which are already profitable, but you want to give shares to an investor or employee, but they only get rights to shares based on how much the company grows after they come in.

If you want to give shares to friends and family investors

Here’s a special note if you’re want to give 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 when you issue shares

Get a shareholders’ agreement when you issue shares to someone. 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 shares in order to give 20% of your company to someone else.

issuing shares

 

Fill out form SH01 with Companies House when you issue shares 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, Gov.UK 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 implications when you issue shares in your business

This really depends on whether the shares you issue are worth anything. If you’re a new startup 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 and the business is making more profit, the shares could be worth money. Which is where HMRC start to get interested. They might want to know if you’ve given your investor something for nothing.

HMRC’s thinking goes like this:

Your company issues shares worth (on paper) 500k to an investor in exchange for 100k of cash. So (on paper) the investor has made 400k. So HMRC wants 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 (or a new employee) with a fat tax bill, so it’s best to be really clear about this beforehand. 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

How I help you work out how to give away shares in your business

This has become a bit of a specialist area for me, and I’ve helped dozens of business owners (and employees who want to get shares in a company) to work out their strategy for giving away shares in their business. It’s a fascinating area I love helping people with.

If you’d like some help to get to grips with the complexities of giving away shares in your business, you can book a one-off decision-making session with me, either face to face in my office in Brighton, or on Skype.

We’ll spend a couple of hours going over how you should handle this (and, indeed whether you want to give away share in your company at all) and work out a plan of action for you.  The sort of issues we might work on in this session could include:

  • What proportion of shares you should give away
  • How these should be valued if you issue shares to an investor
  • What you should expect an employee to contribute in return for the shares, and how getting the shares would affect their overall remuneration package
  • Your negotiating strategy
  • How to protect yourself and your company in the long run, and what to watch out for in the negotiations.

Book a 2-hour decision-making session with me here

Other helpful articles about how to give shares to others

You might want to also read these articles about shares and equity:

Giving shares and equity away

Getting investment into your business

The difference between share options and shares for small businesses

The EMI scheme for giving shares to employees

The big danger in chasing investment

The advantages and disadvantages of a share issue

What are growth shares?

Photo credits to gorilla from pxhere, thumbs up IA Walsh, Sharon McCutcheon and  rawpixel on Unsplash, Simon Dack from Vervate

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Julia Chanteray