Investing in time = receiving shares and dividends?
August 22, 2011 12:40 PM Subscribe
I am about to get involved in a company and begin receiving shares for my work. I have questions.
This is a bit long but I'll try to be as clear as possible. Anonymity is an obviously necessity. This company is located and registered in Canada. The basic story is, I've worked in the past with the owners (a family of 2) as a salaried employee and they are my good friends. To grow, they need someone they trust, who possesses a specific, not common knowledge of their business (which I have) and who has time and energy (which I have too) to become project manager for an important expansion project. They approached me, and this was something I was somewhat expecting.
I have no money to invest (and they don't want money but someone with time and involvement, a trusted partner to support their growth) so I would work for shares (and for an hourly salary as well, for parts of the time). We are currently discussing terms, and the general model is we would sign a contract that states that every year worked (with a job description and salary clearly stated) would bring me a percentage of share, up to a maximum to be reach (something like 10-20% in 3-6 years, to be confirmed). Now I do trust them but don't want to mess this up; it's not that I fear I would get ripped, but rather I'm not sure how much needs to be discussed ahead of time. For example, are there different classes of shareholders? Different types of shares? This is all new to me, and the first time they'd do something like this as well.
I have a lot of these kind of questions but am not sure who to turn to to get an objective summary of important points to be included in the initial discussion and the binding agreement. Should I go with a lawyer, a chartered accountant?
TL;DR: I will invest a couple of years (3-6) of my life to become a shareholder in a company I like and believe in, and according to a valuation that I trust (based on my knowledge of the field and previous projects I did with the company), this would be enough to live with and keep growing within the company (there is a lot of room for expansion); So:
1. If this happened to you, what do you wish you knew before getting into this?
2. What kind of expert could answer my questions and make recommendations? Could I do something like a 2-hours confidential consultation for a one-time fee, for example?
3. If you have personal recommendations in the Province of Quebec or have specific questions, I can be reached at ashareholderquestion at gmail dot com.
thanks a lot!
This is a bit long but I'll try to be as clear as possible. Anonymity is an obviously necessity. This company is located and registered in Canada. The basic story is, I've worked in the past with the owners (a family of 2) as a salaried employee and they are my good friends. To grow, they need someone they trust, who possesses a specific, not common knowledge of their business (which I have) and who has time and energy (which I have too) to become project manager for an important expansion project. They approached me, and this was something I was somewhat expecting.
I have no money to invest (and they don't want money but someone with time and involvement, a trusted partner to support their growth) so I would work for shares (and for an hourly salary as well, for parts of the time). We are currently discussing terms, and the general model is we would sign a contract that states that every year worked (with a job description and salary clearly stated) would bring me a percentage of share, up to a maximum to be reach (something like 10-20% in 3-6 years, to be confirmed). Now I do trust them but don't want to mess this up; it's not that I fear I would get ripped, but rather I'm not sure how much needs to be discussed ahead of time. For example, are there different classes of shareholders? Different types of shares? This is all new to me, and the first time they'd do something like this as well.
I have a lot of these kind of questions but am not sure who to turn to to get an objective summary of important points to be included in the initial discussion and the binding agreement. Should I go with a lawyer, a chartered accountant?
TL;DR: I will invest a couple of years (3-6) of my life to become a shareholder in a company I like and believe in, and according to a valuation that I trust (based on my knowledge of the field and previous projects I did with the company), this would be enough to live with and keep growing within the company (there is a lot of room for expansion); So:
1. If this happened to you, what do you wish you knew before getting into this?
2. What kind of expert could answer my questions and make recommendations? Could I do something like a 2-hours confidential consultation for a one-time fee, for example?
3. If you have personal recommendations in the Province of Quebec or have specific questions, I can be reached at ashareholderquestion at gmail dot com.
thanks a lot!
Some things to remember:
- actual shares vs. options = two different things... this may not apply to you but I didn't really understand that options are merely the "option" to buy a share at a certain price, which means the value is the difference between what it is worth and what you paid for it. And if you stop being employed, depending on what the agreement is, you may lose those options (they may or may not expire under different terms).
- I don't like the year term. Make it every 3 months or 6 months, and have firm dates/milestones. You don't want to work for 10 months and not get what's coming to you...
But yeah, get a lawyer. And have him negotiate with them so that you don't allow your personal feelings or emotions to contaminate the process.
posted by teedee2000 at 12:59 PM on August 22, 2011
- actual shares vs. options = two different things... this may not apply to you but I didn't really understand that options are merely the "option" to buy a share at a certain price, which means the value is the difference between what it is worth and what you paid for it. And if you stop being employed, depending on what the agreement is, you may lose those options (they may or may not expire under different terms).
- I don't like the year term. Make it every 3 months or 6 months, and have firm dates/milestones. You don't want to work for 10 months and not get what's coming to you...
But yeah, get a lawyer. And have him negotiate with them so that you don't allow your personal feelings or emotions to contaminate the process.
posted by teedee2000 at 12:59 PM on August 22, 2011
Seconding that you need a lawyer who understands the ins and outs of an arrangement like this. I'm not familiar with corporate structures in Canada but in the US, for example, having an equity interest in a small company can open you up to liability (and specifically tax liability) down the road. My wife recently negotiated a contract with a company that includes a growing equity share and there was much work done on the part of our lawyers to make sure that she was protected from worse case scenarios. If you're going down this path a lawyer is necessary AND to be clear, bringing a lawyer to the table does not/should not be seen as something contentious by your friends. This is just smart business all around.
posted by donovan at 12:59 PM on August 22, 2011
posted by donovan at 12:59 PM on August 22, 2011
A contrarian suggestion: you state that you have no money to invest - yet, you WILL be investing money in this venture, in the form of salary you will NOT be receiving (I am assuming the hourly salary you will receive will not be market rates).
The shares you will receive will be highly illiquid. Assuming all goes well, you could be invested in this company, with no opportunity for return, for 10 years or more. Can you afford that? Can you afford to LOSE that deferred income entirely, if the venture goes bust?
If not: Can you negotiate the right to "put" your shares back to the founders after a period of time, for a prenegotiated amount? Or, can you simply negotiate a nice, hefty, salary? In this global economy, the latter might be better.
posted by scolbath at 1:19 PM on August 22, 2011 [2 favorites]
The shares you will receive will be highly illiquid. Assuming all goes well, you could be invested in this company, with no opportunity for return, for 10 years or more. Can you afford that? Can you afford to LOSE that deferred income entirely, if the venture goes bust?
If not: Can you negotiate the right to "put" your shares back to the founders after a period of time, for a prenegotiated amount? Or, can you simply negotiate a nice, hefty, salary? In this global economy, the latter might be better.
posted by scolbath at 1:19 PM on August 22, 2011 [2 favorites]
Unless you think this business will one day go public or will be bought by a larger company, you're only going to get a headache for owning shares in it. Unless one of those two things happen you will never be able to sell the stocks for what you think they are worth. Even if one of them does happen, you still may never be able to sell them for what you think they are worth.
Have the owners expressed interest in losing control of their baby for a tidy sum or are they against that idea?
Unless you are sure one of those two things is at least a possibility you're not getting anything of value by accepting shares in a small company. And unfortunately, what you are getting is the potential for a big pain in the ass. Depending on the structure of the shares, you may need to pay a percentage of the taxes on behalf of the company. If the shit hits the fan you may be in share of some of the fault. If the company gets sued, you may have to deal with the BS. Unless you're confident there might one day be a payoff ($$$$), I'd stay away from taking ownership in a company.
Talk to a lawyer....
posted by pwb503 at 2:49 PM on August 22, 2011
Have the owners expressed interest in losing control of their baby for a tidy sum or are they against that idea?
Unless you are sure one of those two things is at least a possibility you're not getting anything of value by accepting shares in a small company. And unfortunately, what you are getting is the potential for a big pain in the ass. Depending on the structure of the shares, you may need to pay a percentage of the taxes on behalf of the company. If the shit hits the fan you may be in share of some of the fault. If the company gets sued, you may have to deal with the BS. Unless you're confident there might one day be a payoff ($$$$), I'd stay away from taking ownership in a company.
Talk to a lawyer....
posted by pwb503 at 2:49 PM on August 22, 2011
Lawyer is always good, but check this out with a tax accountant. Depending how the shares are classified, valued and distributed to you, all can have major tax implications. For example if you get 20k in shares plus pay of 20k, you will be taxed as if you made total 40k. Good accountant/lawyer team should minimize taxes for both you and the company you're joining.
Also, be aware of future tax implications for both you and the company: some structures of shares/options in Canadian owned companies can be counted into the capital gains exemption (up to 750k over a lifetime) which is great for you and can lower the total taxes paid by you and the firm.
Not easy, but totally worth finding the right type of accountant. The big guys like Deloitte will have specialists in these areas, and might be worth the few thousands that their help will cost in tax and future tax savings. Look for business associations in your area, they might link you up with someone. If you're in Ontario, Ontario Centers of Excellence could provide a good first place to ask where to find these services, for example.
As to the "worth" of shares: do you trust your friends, do you think the company has potential, and are you ready to work hard to grow this business? Go for it, but have a hard stop when you'll bail by if things don't grow as quickly as you think they will. Entrepreneurship is not for everyone, but it's fun if you don't bet the entire farm on the venture.
posted by Yavsy at 8:03 PM on August 22, 2011
Also, be aware of future tax implications for both you and the company: some structures of shares/options in Canadian owned companies can be counted into the capital gains exemption (up to 750k over a lifetime) which is great for you and can lower the total taxes paid by you and the firm.
Not easy, but totally worth finding the right type of accountant. The big guys like Deloitte will have specialists in these areas, and might be worth the few thousands that their help will cost in tax and future tax savings. Look for business associations in your area, they might link you up with someone. If you're in Ontario, Ontario Centers of Excellence could provide a good first place to ask where to find these services, for example.
As to the "worth" of shares: do you trust your friends, do you think the company has potential, and are you ready to work hard to grow this business? Go for it, but have a hard stop when you'll bail by if things don't grow as quickly as you think they will. Entrepreneurship is not for everyone, but it's fun if you don't bet the entire farm on the venture.
posted by Yavsy at 8:03 PM on August 22, 2011
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