Offered share of company in lieu of payment

nice1franko

I've been offered a 20% share of a company in lieu of payment for work I will do.

I estimate it to be at least a hundred hours work between now and the end of the year.

I have a separate full-time so this work will be done evenings and weekends.

I've been promised that if the company does well then I'll be well paid at the end of the year. The obvious implication is that it doesn't then I get nothing.

I've several questions though:

1) I'm not happy with the 'promise' of payment. How can I draw up an agreement of exactly what I get paid and it be legally binding and not involve a costly solicitor?

2) What exactly does a share of the company entitle me to, if anything or is it basically a token gesture?

3) What are the tax implications for me if I do receive payment (I'm a PAYE worker)? Should I setup as a sole trader as well? (I'd imagine the payment would not be greater than 5k)

Tony Almeida

nice1franko wrote: »

I've been offered a 20% share of a company in lieu of payment for work I will do.

I estimate it to be at least a hundred hours work between now and the end of the year.

I have a separate full-time so this work will be done evenings and weekends.

I've been promised that if the company does well then I'll be well paid at the end of the year. The obvious implication is that it doesn't then I get nothing.

I've several questions though:

1) I'm not happy with the 'promise' of payment. How can I draw up an agreement of exactly what I get paid and it be legally binding and not involve a costly solicitor?

2) What exactly does a share of the company entitle me to, if anything or is it basically a token gesture?

3) What are the tax implications for me if I do receive payment (I'm a PAYE worker)? Should I setup as a sole trader as well? (I'd imagine the payment would not be greater than 5k)

Well, a share in the company and you would be entitled to dividends presumably. Also, based on the premise the company does well, you will be getting a wage too, so it seems like a fair deal for 100 hours work.

Assuming your not a hitman.

As regards a contract, if you could get them to sign a simple contract stipulating that you will be paid x amount before christmas, then you will be legally covered anyways..

Maybe im talking balls, but thats my limited understanding of the topic anyways.

betonit

If it does well as you say you get paid. So is that payment of the 100hrs plus 20% for taking the risk?
Make sure its clearly defined what well means and theres a contract.

do you believe it has a viable future?? If so 20% could work out to be alot and worth the risk maybe.

nice1franko

betonit wrote: »

If it does well as you say you get paid. So is that payment of the 100hrs plus 20% for taking the risk?
Make sure its clearly defined what well means and theres a contract.

do you believe it has a viable future?? If so 20% could work out to be alot and worth the risk maybe.

I'm willing to take the risk alright. I'm just concerned that even if it does work out then just I'm at their mercy.

If type up a quick letter or email stating that if, at the end of the year, the company is in profit exceeding x that I should be paid y and get them to agree to it maybe that would be enough. Even if it isn't legally binding it will at least establish some agreed expectations.

Cgm

A simple one page/2 page contract can be drawn up quite simply and cost efficiently. I would suggest you do nothing until this is signed and witneseed etc as it is important for you to have something to fall back on.

If you become a 20% shareholder and are also paid consultancy fees, this source of income is obviously outside your usual PAYE system so you would have to register as a sole trader and possibly register for VAT etc. There will be an element of self assesment for you at the year end. The 20% share if not sturctured properly will also lead to further taxation if the company starts to make money and there is avalue on the shares.

Niall_G

You need a shareholders/management agreement specifying who does what and who gets what. This can be very long and complex or simple, but without it, general company law will apply. In that scenario, as a 20% shareholder you are entitled to 20% of the dividends and 20% of any distribution if the company is wound up. However, since you are not a director, what is to stop your majority shareholder simply voting not to make any dividend, or indeed to simply pay himself a salary sufficient to ensure there is no profit to distribute? At the very least I would suggest your agreement should specify what salary he is entitled to before your payback kicks in. This could then be by way of a salary for you, or simply 20% of a dividend.

If you see yourself getting more involved in the future it would probably be well worth getting legal advice. If your only involvement will be these hours and there is a level of trust, you might construct an agreement between ye, but have something in writing!

conolan

If you do 100 hours at say €80 per hour, then they are saying that company is worth 5*80*100 = €40,000. Applying normal valuations, that says that turnover might be 30k-50k per annum. IF (big if) they can show potential of much higher turnover within 2 years then your stake may be worth something decent. Will they agree to buy out your stake in 2 years for 4 or 5 times the current valuation (€8,000)? Or will they give you your 8k at xmas and let you keep your 20%. Suggest you make the payment trigger relative to audited turnover, not profit.

nice1franko

Cheers lads, sounds like solid advice. I'll think some more on it but I feel much better equipped to deal with it now.