Question about splitting business ownership

LookingFor

This is sort of a theoretical (for now), but...

If, say, I have a limited company in Ireland.

Is it possible for me to assign a stake in that company to a group of people that is elastic?

Like say I wanted to give my employees a stake in the company. Can I reserve a certain maximum stake in the company that upon sale of the company will be split among all employees according to a given formula?

That is, the group who 'owns' that stake can grow over time, share of the stake will fluctuate depending on the growth of that group and perhaps other factors too?

Is this possible to structure? Is it legal? Should such a structure be formalised, or should it just be treated as a 'promise', with me handling the divvying up of that stake upon its liquidation (e.g. if the company was bought out)?

Thanks for any advice..

LookingFor

Sorry to bump, but just to clarify - I have seen some info out there on employee share schemes and the like. But I'm really kind of wondering about a more general case - gifting a share in the company to an arbitrary (but defined) group of people that can grow over time...if that makes sense..

MOH

LookingFor wrote: »

Is this possible to structure? Is it legal? Should such a structure be formalised, or should it just be treated as a 'promise', with me handling the divvying up of that stake upon its liquidation (e.g. if the company was bought out)?

I presume there must be some way of doing it legally, although I haven't a clue how (but a pension scheme works along basically similar lines). I'd imagine if it's something you're serious about it's best to have some kind of formal structure on it rather than a promise.

Reminds me of a Dragon's Den I watched recently where the guy was looking for investment in return for about 30%, and mentioned he had some people who had helped him out who he wanted to give some equity to.
He was offered investment in return for 50% of his company. He tried to talk them down to 45% but they wouldn't budge. Obviously, that left him the problem that if he did give some of his equity to someone else, he'd now own less of his own company than the two dragons.
He took the deal and ended up doing quite well, but I don't know if he ever passed on any equity to anyone.

Circumstances can change, and it's probably better not to wait until there's sums of money being waved around to decide who's getting what share.

kenbrady

LookingFor wrote: »

Sorry to bump, but just to clarify - I have seen some info out there on employee share schemes and the like. But I'm really kind of wondering about a more general case - gifting a share in the company to an arbitrary (but defined) group of people that can grow over time...if that makes sense..

It's a complicated area with lost of tax implications and regulations.
You are looking to set-up a trust for employees holding shares for them.
Great in theory but doesn't work that well.
Every time a new employee joins the company stake get diluted down, is every employee an equal in the trust.

It's usually done on a per employee bases, I have lost of shares in dotcom flops from my earlier years. You would get an amount of shares when you join the company, but these shares vested over time, so each year you work there you get a perecentage of your shares.

If you are doing this to incentivise the staff, you will have to get proper legal help to structure it.
An easy way to do it would be just to use the honor system, tell staff if I sell company I will give you X between yourselves

LookingFor

kenbrady wrote: »

It's a complicated area with lost of tax implications and regulations.
You are looking to set-up a trust for employees holding shares for them.
Great in theory but doesn't work that well.
Every time a new employee joins the company stake get diluted down, is every employee an equal in the trust.

I'm talking about reserving a stake in advance, and then splitting it among a group of people when that stake is realised/liquidated...so once the stake is reserved that's the maximum. Further additions to the group wouldn't dilute the company stake further, but would dilute the share of each member of the group.

So say I reserve, like 10000 'shares'. And there are 20 people in the group. Each has 500 shares. Then say, there are 25 in the group. Each has 400.

However...the more people in this group, the more valuable the company should be. So even though you might have a smaller piece of the pie it may be worth more.

I guess I should concretise this...I didn't want to because you might think I'm mad :pac: But this is what I'm thinking:

I have a business I'm starting at the moment, it's an online service that is free to use.

I need to start generating a cashflow so I've been thinking of various options.

One that has sprung to mind is the idea of offering a premium version of the product that is a bit more advanced etc. for a monthly fee.

So I was considering the idea of gifting a share of the company to the users of this premium version. Set aside some x% of the company and then, when that stake's value is realised (e.g. if the business is sold), that share would be divvied up among those users.

Technically they wouldn't be paying for the stake. They're paying for the premium membership, of which this 'gift' of a share in the company is one thank you from us.

So as you can see, it's a bit different from say an employee scheme. These folks aren't employees. They're just a variably sized group of people we would like to thank by putting them in a pool of people who share a fixed-sized stake in the company.

Is it enough to promise this? Is that legal? Should such a structure be formalised? Can we vary each member's share over time depending on certain criteria (e.g. how long they've been members etc.)?

I've been trying to find examples of others doing something similar but I can't find any. Not sure why...crowd-powered capital seems like a pretty ideal route for most web startups. I think for sure it would make it much more viable for us to offer a premium subscription service if we could offer that side-perk.

Thanks for any thoughts again

antoinolachtnai

It is legal if you do it the right way. But there are two problems. 1. What you are proposing would not generate any capital, just customers. 2. The legal and commercial arrangements to do this all legitimately would probably be pretty expensive.

The 'crowdsourcing' of capital as you call it is a complicated business. It is a business with some dark moments in its history, and that is why there are a lot of rules around it.

It all really depends on how much money you need to raise, and for what.

antoin.

LookingFor

Hey Antoin,

Thanks for your feedback!

You're right, it's not really generating capital...but more generating revenue, offering a perk to help generate revenue.

We don't need a huge amount of capital, but we do need cashflow. We were fairly resigned to muddling along on ad revenue, but if we can establish a subscription model it would be far more reliable (and, I think, substantial for us at this stage).

Could you share, or point me in the direction of, any more information on legal and commerical arrangements I'd need to arrange?

I'm guessing on the commercial side we need:

1) a method to subscribe and charge members
2) a terms-of-use/contract outlining the users' stake and how it'll work, how the stake will be divided etc.
3) a way to show a member what their share stands at currently (?)
4) cancellation of membership, refund mechanisms, and opt-out from the users' stake pool if necessary

..? On the legal side I'm less clear. Any thoughts/info/links or info on precedence for this and prior experience others have had would be greatly appreciated. I've had limited luck finding a template to work from.

antoinolachtnai

It's really very complicated. Here's something basic about the UK situation - http://www.biggartbaillie.co.uk/ideas--insights/all-articles/corporate/the-new-regime-for-offering-shares-to-the-public.aspx

The situation in Ireland is different, but not enormously so.

You are talking about a lot of complexity to issue shares to the public.

There are other things you can do, like offering debt, and it is a bit easier. But it is a lot of complexity.

I do not think this will really attract customers to your business (although i am guessing about it). Sometimes it works to issue shares or warrants to a key customer or supplier, but it's a special enough sort of arrangement..

LookingFor

Interesting link, thank you!

It sure looks complex... I'll have to look into this a lot more. Anything I find I'll relate here. A book I'm reading promises more detail on this kind of thing later on, so maybe that'll provide a simpler/clearer route to doing this.

Cheers again

antoinolachtnai

I hate to make definitive statements, but there really is no simple, clear route. And anyway, think carefully about whether you really want that many shareholders to deal with.