There are many reasons why you might want to give shares in your limited company to someone else. Maybe you need to issue shares to an investor or decide on the equity split for a new business partner. Often, as the MD of a business, you want to reward and incentivise a key member of staff by giving shares to that employee. You want that person to stay around and make even more of a contribution to the business.
How to give shares in your business without it becoming a major headache
When you issue shares to an investor, a business partner or an employee, this is a significant decision, and there are some crucial points to be sure of before you fill out the forms at Companies House to issue the shares.
You need to make sure you understand your options. Giving shares in your business away is usually something we only do once or twice in our lives, and your path can be unclear when you’ve never done this before.
It’s a long-term relationship
When I work with business owners on this, I often point out that giving shares to someone is a bit like getting married because it’s challenging to get out of once you’ve done it. When someone owns a part of your company, it’s more challenging to take this back than getting divorced.
You might think that you can buy them out later, but in reality, this is unlikely. As your company’s value increases, you may find you cannot buy out that employee or investor simply because the value of their shares has gone up over time.
The business will probably never be able to buy them out either because most small businesses don’t have that kind of cash. Don’t confuse your small business with the deals that go on in much bigger companies.
Do you want to share all the money?
If you might want to sell the business in a few years, remember that the person you give shares to will get a slice of the sale price. That could be absolutely fine because their work or investment might have helped you grow the business much more than you could have done on your own, so you all end up with more money. But it’s something to bear in mind, especially if you’re tempted to give them a big chunk of the company early on. I often see start-up founders who are overly generous and then regret this later.
Remember – if you give 20% of the shares in your company to one person, they will get 20% of whatever you get when you sell the company later. And you will only have 80% of the shares left, if you want to give shares to someone else further down the line.
Do you want to pay dividends on the shares you issue?
Most of us business owners use our dividends to pay our mortgage and put food on our table, so you have to be sure that you’re not setting up an automatic right for a shareholder to receive dividends the same way you do as the founder and principal shareholder. Later in this article, there’s some good advice about A and B classes of share and the relationship with dividends.
Giving shares can be a great idea
Giving up shares to an investor
When you give shares to an investor, it’s because they’re giving you cash in return for the shares
This investment is a great way to build up cash flow to invest in marketing, staff or stock. Unlike a bank loan, you don’t have to pay back the money to the investor because they’re getting the shares in return for the investment. They now own a part of your company. An investor is rarely looking for dividends as their return from the company, they want you to give them shares so that they get a proportion of the money when you sell.
Splitting the equity with a business partner
When you’re setting up a new limited company with a business partner, they usually expect to get shares in the new company. But you still want to make sure that you do this in the right way. You want to make sure that you and the company are protected, no matter what might happen in the future. When we start a business with someone we often assume that this should be a 50:50 split between the business partners, but you don’t have to go this way. You should both have different classes of shares to allow you to pay different dividends if you decide to, and you do not have to give the same number of shares to each business partner.
Giving equity to a key employee
Giving shares to a key employee can be a good idea. Especially if that new employee is a valuable person such as a new sales manager or a very experienced technical person, maybe someone you couldn’t afford to pay at their usual market rate. You may be able to entice them away from their dull corporate job by giving them shares in your exciting, fast-growing business.
When you give shares in your company to reward them, it’s a great way to keep people motivated and make them feel that they’re part of the family.
You may already have staff who are vital to the business. You want to incentivise them, make them feel that this is their business too – that they’re more than just an employee. And you want them to stick around and continue working for your company.
Using equity as part of your succession planning
I often speak to business owners who are thinking ahead to their retirement or when they might sell the company. They have people working for them who are ready to step up, maybe to take over as the Managing Director.
Giving senior employees shares in the business can reinforce that you take them seriously and that you’re ready for them to start taking on more responsibility. And, of course, you’re also making it clear that you are willing to share some of the profits with them, which makes it worthwhile for them to take on more of the management role. You may want to start transferring some of the equity to the senior staff who you want to take over sooner rather than later, especially if the business is growing quickly.
But… let’s look at some alternatives here.
Alternatives to just issuing shares
You don’t necessarily have to give shares to other people, especially employees. I often suggest that there are more straightforward arrangements that don’t need as much legal paperwork or such a long term commitment.
Consider a profit-share scheme
You might want to have a profit-sharing scheme for staff, rather than give them shares. That’s a lot simpler to set up. Often, employees would rather have a profit-related bonus where they get some extra cash in their pay packet now than wait for more money in ten years when you may or may not sell the company.
Your new employee might also prefer to work on a part salary, part profit-share basis, rather than getting shares in your company. Think about what would motivate them rather than assuming they would prefer to get shares. You can always ask them which one they would prefer.
An investor will almost always be looking for equity. Unless they’re a friends and family type investor who are investing primarily because they want to support you. If a family member wants to invest in your company, you may not want to give them shares, because giving shares is forever. You may instead like to suggest that they lend you money and that you pay them back with a share of the profits over a certain level.
What about giving growth shares?
When your company is already well established and making a good profit, you might want to think about using growth shares rather than ordinary shares.
Growth shares are where you give shares to someone, but they only get dividends or a proportion of the sale value on the part of the company that grew after you gave them the shares.
