Owner Managed Businesses – Introducing an Equity Partner

by Diane Yarrow

15-06-2017

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.

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 minimum term and compensate them for being your partner and for contributing to enhance your business’s value during that period.

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 and are ready to step up to new roles. Whether you grant such person an option over shares in your company or issue them shares straightaway it gives them a sense of ownership. Recently we have seen an increase in instructions from owner managed business to assist them to introduce equity partners.

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.

If your company is eligible to issue tax advantageous share options for employees then you will require HMRC clearance which your accountant will be able to assist you with. Whether you want to grant share options or issue shares straightaway to an employee, there are a few issues that you need to consider:

  1. Do you want to link share option or shares to performance or time of service?
  2. 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?
  3. Do you want to share profits of the business this employee is going to help you build upon?
  4. Do you want to retain value of the business you built before such employee joined the business?
  5. How much control you would want to retain after new shares are issued to him (whether pursuant to an option or otherwise)?
  6. In case things go wrong how that will be dealt with e.g.:
    1. 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?
    2. if something happens to you before your plans are realised how you want to protect rights of your family?

As your business, business plan and personal circumstances are different, the above mentioned issues and any other issues that may affect you will have to be tailored in the manner that help you achieve your goals.

Share options and rights attached to the underlying shares or the new shares being issued by your company can be structured in various ways and you should obtain advice to ensure that appropriate provisions have been put in place.


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