As an entrepreneur you start and manage your businesses, but as it grows you may require a partner to continue the growth or to introduce another dynamic to the business. The personnel market is becoming increasingly competitive with difficulties in finding the right talent and more importantly retaining them.
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Why an equity partner would suit me?
Many owner managed businesses build equity value over a period of time. The key employee you are trying to introduce and/or retain in your business would most likely to add to your business’s valuation over a period of time. Therefore, you would want to retain him/her for a period of time and compensate them for being your partner and for contributing to enhance your business’s value during such time. A share in equity gives such an employee a sense of ownership, therefore, it is becoming increasingly popular amongst owner managed businesses to dilute a part of their equity in favour of a key employee. Such employees may be new recruits or they have been with the business for a considerable time and are ready to step up to new roles.
Ways of introducing an equity partner
When you consider introducing an equity partner, you have a couple of options. You may want to issue shares to a key employee straight away. It may be a good option if the employee has been with the business for a period of time and you are comfortable with rewarding them in this manner.
Other alternative is to award them an option to subscribe for shares on happening of certain events. This can be linked to the ultimate sale of the business/company or performance of the employee or time. If your company is eligible to issue tax advantageous share options for employees then you will require HMRC clearance which your accountant or tax advisor will be able to assist you with. If the company is not eligible to issue tax advantageous option you may still want to issue unapproved option which will have all advantages of share option except the tax benefit.
Equity partner and unwarranted consequences
For you parting away equity in your business is a big step and it can lead to unwanted consequences if not documented properly.
For instance, an employee leaves the company after acquiring shares and a few years later you cannot find him when you are in the process of selling your company or the shares were transferred by the employees to a third party you do not want to be a shareholder in your company. Also, if you grant an option to be exercisable within 5 years but only upon sale of the company’s shares or assets and such sale is not achieved then the employee would lose the option. You may be able to grant a new option but if the company has grown exceptionally during that period then it may not be a very attractive option for the employee.
You need to consider a few uncertainties and your objective when you structure these arrangements.
Issues to be considered
Whether you want to grant share options or issue shares straightaway to an employee, there are various issues that you need to consider issue, which could be:
- Do you want to link share option or shares to performance or time of service? You need to consider this carefully in conjunction with what you are trying to achieve from the equity partner.
- Do you want to share value of your business with such employee when you ultimately sale the business and retain him/her until such sale?
- Do you want to share profits of the business this employee is going to help you build upon?
- Do you want to retain value of the business you built before such employee joined the business?
- How much control you would want to retain after new shares are issued to him (whether pursuant to an exercise of an option or issue of shares)?
- In case things go wrong how that will be dealt with e.g.:
- in case the employee leaves the business whether you would want them to take the shares and continue to benefit from value that you may build after they have left? If the employee needs to give up his shares when leaving how that will be dealt with: consider issues of valuation and consideration payment.
- if something happens to you before your plans are realised how you want to protect rights of your family? Whether your share in the business should continue to yield dividends for your family or whether that is compromising the sense of ownership for the management who is operating the company without having share in the profits.
All these issues and others which may be more peculiar to your needs will have to be considered taking into account your business, business plan and personal circumstances. The solutions to such issues will have to be tailored in the manner that help you achieve your goals and appropriate provisions will have to be incorporated in the relevant documents.
Gardner Leader Solicitors can work with you to find the most appropriate structure that will suit your requirements and draft necessary documentation to implement that structure. Recently we have seen an increase in instructions from owner managed business to assist them to introduce equity partners. To speak to one of our experts, please give us a call or visit our website.