You have identified an employee who plays an important role in your business. You want to reward their efforts and offer an incentive that keeps them invested in growth of the business. Do you bring them on as a minority shareholder?
What to consider
The decision to bring on an employee as a minority shareholder is not one to be taken lightly and there needs to be some careful planning. Here are some points for you to consider:
- What percentage of shares do you want to offer?
- Should you stagger the offer of shares say 5% now and another 5% once your employee meets key performance indicators?
- Do you want your employee to pay for the shares, or are they a reward for performance? If your employee is to pay, how will you structure payment, cash investment and a loan?
- What will happen to the shares if the employee leaves the business?
- What rights will your minority shareholder have?
The points highlighted above, are certainly not all that you should consider; they are a starting point and there are pros and cons you need to be aware of which may influence how you decide to proceed. To ensure you are aware of these pros and cons, it is important that you consult trusted advisors. Talk to your solicitor, and other professional advisors, such as your accountant and a business mentor.
What percentage to offer
A key issue for consideration is the percentage of shares you offer. How many shares you offer will impact where the balance of power lies and who controls your business. For example, once you relinquish more than 25% of your shareholding, those holding greater than 25% of the shares may be able to influence the control of the business. It is therefore important that you consider whether you will make an offer to just one employee, to more than one, and what percentage of shares you will offer over time.
A well-structured agreement
Once you are armed with some background knowledge, you will need to have a solid shareholding agreement in place. This agreement should address not only the number of shares, the rights and obligations associated with the shares it should also address: exit options; a suitable restraint of trade; and provide you with a right of first refusal or at least an option to repurchase the shares.
Bringing on employees as minority shareholders can seem like an attractive option, however it does need some careful planning, some good advice and a well-structured agreement. If you are considering venturing down this track, don't be afraid to ask for some advice, our commercial team is ready to assist.
