Equity instead of Salary

GoneShootin

I'm in a job at the moment that as led me to the top of the senior management team. This sounds fancy, but really the company is a small one and events have led me to making a strategic decision -

"Can I afford to enjoy the work, but be asked to essentially try and save this thing from sinking without being paid a decent salary". At the moment my pay is far far less than what I could be doing elsewhere, which was fine for my then position in this company. Now though I find myself in a senior position with potentially massive responsibility, but still at the same pay packet.

First up I know the P&L figures, and simply put the company can't afford to pay me a salary to match the position. So my choice is this:

a) Equity + minimal increase of salary [salary increase purely to give me some kind of visible motivation!]

b) Move on.

Option b) sounds the simplest, but I would lose the chance of being part of a success, particularly as I would be deeply involved in it's ion. Option a) is what I'm leaning towards now, but the Equity bit has me confused.

I know that the Issued Shares are @ 100 x 1€, and that the Authorised Shares are 1,000,000 x 1€ (standard stuff). I also know that existing Directors A has 90 of the 100 Issued, and Director B has 10 of the 100 Issued.

My questions:

1) If I go in looking for 5% of the equity, does this entitle me then to essentially 5 shares @ 1€?

2) What dis-advantages, from the point of view of the owner, is there making that share transfer?

3) Where is my money to be made if I can help turn the company around by having this stake in the shares?

4) If I choose to move on after giving it my best shot, having gotton the shares, how are those shares valued if I choose to sell out?

Victor

I'll let others comment further, but having 5% in such a situation may be useless as one shareholder will still hold more than 80% and can, if they wish, force you to sell those shares.

You should perhaps talk to an accountant or solicitor who deals with such situations.

Kinetic^

Do your personal circumstances allow you to remain on the current wage and stay there for about 2 years?

TheCostumeShop.ie: Ronan

1) If I go in looking for 5% of the equity, does this entitle me then to essentially 5 shares @ 1€?

Your Entitled to 5% of the businesses value and profits. the original price of shares is irrelevant.

2) What dis-advantages, from the point of view of the owner, is there making that share transfer?

None other than loosing some equity on a business that he possibly can't afford to keep going.

3) Where is my money to be made if I can help turn the company around by having this stake in the shares?

You'd need to have ratchets in place that you get either pay increases or equity increases if / when you deliver agreed targets.

4) If I choose to move on after giving it my best shot, having gotton the shares, how are those shares valued if I choose to sell out?

At market value, or whatever someone is will to pay for them. You may be restricted to only selling the shares back to the owner because its a small equity holding. So you need a decent solid shareholder agreement written by an expert solicitor in that field.

One concern you should have is that once you become a business owner this will effect your entitlement to social welfare. As job creators we are not entitled to the same fall back as the average person if things don't work out.

maxer68

Are you married
Do you have children
Do you have a mortgage

If no to the above, you can afford to take a gamble and hope that if the economy rebounds (probably 2nd half of 2012 onwards, but then strong growth) you can get the return then.

Then you need to ask, what is the potential of the company. Can it potentially afford to pay you a salary meeting your expectations in the future (3 years down the line) and will the future profits make up for the loss in salary up to the point you are paid full salary.

If you do have other commitments, its a much harder decision.

Another option is to have share options and deferred payment of the difference in salary which can be used at a future date to buy the share options or to be taken in cash when the company makes a profit.

GoneShootin

TheCostumeShop.ie: Ronan wrote: »

One concern you should have is that once you become a business owner this will effect your entitlement to social welfare. As job creators we are not entitled to the same fall back as the average person if things don't work out.

I didn't realise this was the case. So does this apply to any employee/execs that is offered share options?

maxer68 wrote:

Are you married
Do you have children
Do you have a mortgage

- Y
- N [but planning within next 2 years]
- Y

Hence my bind. Exactly as you say I do have committments and so I need to look at the exact questions you have posed.

At the moment the mortgage is covered, and other bills so that I have a couple of quid left over at the end of the month - but not enough to comfortably support a child and have some rainy day money.

Kinetic^ wrote:

Do your personal circumstances allow you to remain on the current wage and stay there for about 2 years?

1 year max, 2 years no.

maxer68 wrote:

Another option is to have share options and deferred payment of the difference in salary which can be used at a future date to buy the share options or to be taken in cash when the company makes a profit

That may be the best bet. Bridges the gap between initial small share amount as Victor highlighted and some kind of "security" in 2 years time. Of course if the company goes belly up then 5% of 0 is 0 and that "security" goes with it.

**** or burst as they say. Thanks for the replies so far guys. This is new territory for me so your feedback is appreciated.

Gambler

TheCostumeShop.ie: Ronan wrote: »

One concern you should have is that once you become a business owner this will effect your entitlement to social welfare. As job creators we are not entitled to the same fall back as the average person if things don't work out.

I may be wrong but my recollection is that this only kicks in if you have a larger than 15% share holding in the company - you should definitely double check this with the relevant authority though!

HellFireClub

What you have to look at OP, is what the 5% represents. If you run with this option, you wil own 5% of the company. As things currently stand, you will own 5% of a company that cannot really pay you a salary. Obviously if you are taking equity, you need to look at what the medium to long term monetary value of the business actually is.

You need to look at this 5% I think, in the context of the business possibly being loss making, or maybe being in profit but at the same time only down to the goodwill of employees like yourself who are taking a knocked down salary...

I wouldn't let any person get inside my head with notional things like, "you'll be part of the senior management team", etc. These things won't pay your bills or put bread on the table. I'd be moving on else where if I was in your situation...

antoinolachtnai

I think there is a bit of realism needed here. If this business needs to be turned around or rescued, how much of the work on rescuing it are you going to be doing? If you are going to be doing the same amount of work as the other directors, you really should be getting one-third in equity or options.

The above assumes that the business has no tangible assets. Another thing that has to be considered is debt the company may be carrying or debt that the company needs to incur in order to recover. It may not be worth owning shares in a company that is heavily indebted.

Basically, the cautions are:

- can this business really support all this management? I presume these shareholders are still around. Is there going to be enough gross profit to pay them all back for their investment and pay them all a salary?

- Will the business be able to buy the shares back from you in a few years? Or how will you get your return?

- does the business need cash investment as well as 'sweat', and if so, who will provide it and at what cost?

On a technical point, you were also talking about transfer of shares. This is probably not what would happen. Instead, new shares would be issued. You would be issued six new shares. You would then own 6 of the 106 issued shares, which would be 6/106 = 5.66 percent of the equity of the company. If it really had to be exactly 5 percent, then the procedure could be to issue 50 shares to you and 860 shares to the larger shareholder and 90 shares to the smallest shareholder in addition to their existing shares. The accountants will sort this out.

There could be tax implications to this too. If you are simply granted the shares, and they are actually worth anything, they are income and tax will be due on them, even though you have not realised any cash yet. The way large publicly quoted companies get around this problem is by issuing options rather than shares. The tax then only becomes due when the options are exercised.

Commercially speaking, owning minority shareholdings in privately held companies can be a negative experience, because there is no market for the shares, and you may not receive a dividend. So you have to think about how you plan to eventually sell these shares for a profit, or alternatively, how you are going to move to a majority position in the company.

So answers to your specific questions.

1. No, not exactly.

2. It's not a share transfer. The disadvantage of issuing the new shares is that the old shareholder now owns less of the company (obviously).

3. You need to agree this in advance in the shareholders' agreement. On the face of it, I can't see how you will make much money owning 5 percent, since even if the company was worth EUR 3m at the end of three or four years hard work, you would only be entitled to 60,000 euros above your salary, which is only 20,000 euros per year.

4. You need to agree this in advance in the shareholders' agreement. If you don't they will probably turn out to be worth very little.

Additionally it should be added that you may need technical legal and accounting advice as well as commercial advice specific to your situation.