Simple small share in a business question.

Bounty Hunter

A mate is starting up a company and needs a little injection of cash. I told him I would give him x amount of cash in return for a 1% share of the company.

I am partially doing it just to help him out and it isn't a huge amount of money (so there is no worry there tbh) but I want everything to be legit and above board and simply want to know what he would need to present to me to to show that I am now a 1% shareholder in his company?

Perhaps there was a better forum but I thought the good folk at Entrepreneurial & Business Management might be able to advise as that is exactly what he is trying to be an Entrepreneur managing a business.

Bandara

Bounty Hunter wrote: »

A mate is starting up a company and needs a little injection of cash. I told him I would give him x amount of cash in return for a 1% share of the company.

I am partially doing it just to help him out and it isn't a huge amount of money (so there is no worry there tbh) but I want everything to be legit and above board and simply want to know what he would need to present to me to to show that I am now a 1% shareholder in his company?

Perhaps there was a better forum but I thought the good folk at Entrepreneurial & Business Management might be able to advise as that is exactly what he is trying to be an Entrepreneur managing a business.

You’d be far better off just loaning him the money as a loan between friends and he pays your back by some agreed date.

There is no need, no benefit and it’s overtly complicated to go making some shareholding agreement. Your just doing it to help him out, it’s a small amount and there’s no worry about being repaid, once you trust the guy just loan him the cash. Otherwise it’s a all a bit dragons dens/dramatic tbh (no offence meant).

Bandara

Bandara wrote: »

You’d be far better off just loaning him the money as a loan between friends and he pays your back by some agreed date.

There is no need, no benefit and it’s overtly complicated to go making some shareholding agreement. Your just doing it to help him out, it’s a small amount and there’s no worry about being repaid, once you trust the guy just loan him the cash. Otherwise it’s a all a bit dragons dens/dramatic tbh (no offence meant).

You’ve no idea the amount involved, the potential growth rate of the business or the possible return on investment, even for a small shareholding. How can you dismiss the OP’s desire to do things correctly in favour of leaving it as a loan between friends, the worst thing two friends could engage in when it involves one of them starting a business?

Bounty Hunter

Bandara wrote: »

You’d be far better off just loaning him the money as a loan between friends and he pays your back by some agreed date.

There is no need, no benefit and it’s overtly complicated to go making some shareholding agreement. Your just doing it to help him out, it’s a small amount and there’s no worry about being repaid, once you trust the guy just loan him the cash. Otherwise it’s a all a bit dragons dens/dramatic tbh (no offence meant).

No offense taken and your point is well made.

However my question still stands if he is offering me 1% of his business for a little extra start up cash, what would he need to present to me to to show that I am now a 1% shareholder in his company?

Bandara

JayZeus wrote: »

You’ve no idea the amount involved, the potential growth rate of the business or the possible return on investment, even for a small shareholding. How can you dismiss the OP’s desire to do things correctly in favour of leaving it as a loan between friends, the worst thing two friends could engage in when it involves one of them starting a business?

The worst thing two friends could do is go into business together.

As the saying goes; Partners are for dancing

Bandara

Bounty Hunter wrote: »

No offense taken and your point is well made.

However my question still stands if he is offering me 1% of his business for a little extra start up cash, what would he need to present to me to to show that I am now a 1% shareholder in his company?

When the company is being setup, most likely by your friends accountant, you are listed as a shareholder of whatever agreed percentage. And most likely you will be a director / or at least the company secretary also I would imagine, someone better versed in the inner workings of company formations can advise on this I’m sure.

Do bear in mind that become a official part of his company could potentially expose you to repercussions should things go wrong/loans unpaid in the future. Hence my initial suggestion to just lend him the cash. It would be unfortunate if it came to it where things didn’t work out for the company and it’s left with debt and your associated with this debt in some form.

I’m sure Dbran or the likes can advise you far better than I. Just tread carefully that’s all.

pedroeibar1

I'm with Bandara on this, you're walking into a minefield and a sure way to lose a friend. To answer your question, the Company Secretary can issue you with a share certificate for your 1%. But - why 1%? Why bother with a shareholding that carries no power? What is the correlation between the cash and the value of 1%? Why bother with a huge downside for you for just 1% and no active role? How is the cash being injected? Redeemable share capital? Preference shares? Loan? If you want to help him out, give him (not the company) a straight loan and have a promissory note drawn up for a definite future date.

Bounty Hunter

pedroeibar1 wrote: »

I'm with Bandara on this, you're walking into a minefield and a sure way to lose a friend. To answer your question, the Company Secretary can issue you with a share certificate for your 1%. But - why 1%? Why bother with a shareholding that carries no power? What is the correlation between the cash and the value of 1%? Why bother with a huge downside for you for just 1% and no active role? How is the cash being injected? Redeemable share capital? Preference shares? Loan? If you want to help him out, give him (not the company) a straight loan and have a promissory note drawn up for a definite future date.

So to clarify, if I was to follow him up on his proposal this is what I should recieve to give assurances that all is as should be?

I get peoples reticence on the issue and it is actually why I specified in the OP " it isn't a huge amount of money (so there is no worry there tbh)" as I was expecting people telling me not to get into business with a mate. If the investment goes sideways, no issue really but there is potential for big growth if it doesn't and I if I was to proceed with it as said above just want to know that all was being done correctly.

pedroeibar1

Shares of the company correctly issued by the Co. Sec. and allotted to you are required by law to be recorded in the company’s books and records so that covers you for your shareholding. However, if there is a further issue of the same class of shares your shareholding will be diluted and your 1% will be reduced.

You say the amount you are investing is small and it doesn’t matter if the venture collapses. So why the fuss about correctness for a small amount and a tiny 1%? A full answer is not a simple yes/no issue because you are linking a loan to a shareholding. You have not given details of this. Are you being issued shares as part of the transaction or as security or as a non-linked event? Another question is ‘who is the borrower?’ – is it your mate or the company? If it is the company and it subsequently ends in a liquidation, you probably will get nothing (unless you have an effective personal guarantee from your mate). Would you want to sue him for recovery? A key question when buying shares is how, when and where to sell them. No professional advisor – yours or your mate’s - would get involved without asking this type of question. That is what shareholder agreements are for.

Although you will not be a director or officer of the company you could still suffer reputational damage, if the mate goes around telling everyone that you are backing him and the company, over which you have no control, fails.
Loan the money to the mate, ask him when (a rough timeframe) it will be repaid to you, then add six months to that and have him sign a promissory note (look it up). Make the loan on the understanding that should the company make millions and be taken over he will remember you. You will then find out if he is a mate.

Bounty Hunter

pedroeibar1 wrote: »

Shares of the company correctly issued by the Co. Sec. and allotted to you are required by law to be recorded in the company’s books and records so that covers you for your shareholding. However, if there is a further issue of the same class of shares your shareholding will be diluted and your 1% will be reduced.

You say the amount you are investing is small and it doesn’t matter if the venture collapses. So why the fuss about correctness for a small amount and a tiny 1%? A full answer is not a simple yes/no issue because you are linking a loan to a shareholding. You have not given details of this. Are you being issued shares as part of the transaction or as security or as a non-linked event? Another question is ‘who is the borrower?’ – is it your mate or the company? If it is the company and it subsequently ends in a liquidation, you probably will get nothing (unless you have an effective personal guarantee from your mate). Would you want to sue him for recovery? A key question when buying shares is how, when and where to sell them. No professional advisor – yours or your mate’s - would get involved without asking this type of question. That is what shareholder agreements are for.

Although you will not be a director or officer of the company you could still suffer reputational damage, if the mate goes around telling everyone that you are backing him and the company, over which you have no control, fails.
Loan the money to the mate, ask him when (a rough timeframe) it will be repaid to you, then add six months to that and have him sign a promissory note (look it up). Make the loan on the understanding that should the company make millions and be taken over he will remember you. You will then find out if he is a mate.

1) Entering into any business situation I would want things to be correct especially with a friend who I would want less reasons to fall out with.

2) I never once mentioned a loan. A friend asked for a small amount of money to get over a hump and said he would give me 1% of his company in return.

3) I would not want to sue anyone and me referencing it being a small amount amount of money that shouldn't cause a huge worry should suggest that wouldn't be the direction I would take.

The reason I put the title as a Simple...question was that that was all it was. I was wondering that if someone did a deal as suggested (giving x amount of money and in return being given a 1% share of a company) what he would need to present to me to show this is the case, that all is above board etc.



I believe that has been answered here (and via PM-thanks) as:

A Share certificate being issued by the company secretary that would be logged on the company register.

Also that I should not offer to be a director and should discuss if my 1% gets diluted further should more investment take place.


If there is something else that I am missing however please let me know

antoinolachtnai

What you are describing is all above board, there is nothing inherently wrong with it.

At the same time, it is poor practice. Assuming your friend’s business is successful, in the medium term it will be a lot more administration and trouble than a straightforward gift or loan would be.

lastusername

This arrangement makes no sense if you are simply injecting a little cash and not going to be participating in the business.

The first reason is that if the business is ever worth anything, you will make very little relative to the part you played in helping it get off the ground. For example, if it was worth a million euro in five years, your stake would be worth the pricely sum of ten grand.

Would you be happy with that, or wishing you'd backed it a bit more or had some sort of role in growing it to that point?

If you feel it has potential, why not try to back it a bit more?

On the flip side, the second reason relates to the perspective your mate is likely to have as the business hopefully takes off. If you've given him a couple of thousand or a few hundred or whatever it is to help him get started, he might be forever grateful for that initial investment, but it's more likely he might be thinking how cheaply he gave away 1% equity to a mate who had no involvement in growing the business.

Then as mentioned, there is the admin overhead associated with such a paltry shareholding for both parties.