Negotiating a share in the company

tempnam

I've been working for a small firm for the past few years. Things are going well. Myself and the boss are the only fee earners and the only 2 full-timers, with part-time admin staff to support.

Each year we have a chat and agree a new salary for me for the year ahead. That's been fine for the past couple of years.

I'm anticipating this year's chat and wondering whether I'm missing something rather than just getting a % increase in salary.

I'm considering asking the boss for a share in the company.

I'm a little ignorant in this whole area though - so I'm not familiar with the ins & outs...

Would appreciate some advice.

jimmii

First thing is to probably be honest with yourself as to how irreplaceable are you really?

Do you have a particular skillset or experience that means you are fundamental to the success of the business? Think about it from their point of view why what is it you bring that would make them want to give up equity which is presumably quite a high proportion of their net worth
How long has the company been going? If it's only been going a few years and you started in your bosses garage and any growth has come from reinvesting profits you've created then it's one thing but if your boss has 100k of their own money and has been at it for 10 years+ then it's likely to be harder to convince them

How much involvement do you actually have with the running of the business? Does the company have much debt? Unless you have a complete overview of the company then you might find it's not something you want to end up liable for! It's amazing how many companies out there look super solid from the outside but on the inside the truth is they are only hanging on by a thread.

If you do have the full picture then realistically unless your boss has already considered this and realises your value to the long term prospects of the company then they're unlikely to be that keen. One way to go about it would be to stick with a standard salary this year but build certain targets into your contract that gives you some equity and take it from there.

tempnam

jimmii wrote: »

First thing is to probably be honest with yourself as to how irreplaceable are you really?

Do you have a particular skillset or experience that means you are fundamental to the success of the business? Think about it from their point of view why what is it you bring that would make them want to give up equity which is presumably quite a high proportion of their net worth
How long has the company been going? If it's only been going a few years and you started in your bosses garage and any growth has come from reinvesting profits you've created then it's one thing but if your boss has 100k of their own money and has been at it for 10 years+ then it's likely to be harder to convince them

How much involvement do you actually have with the running of the business? Does the company have much debt? Unless you have a complete overview of the company then you might find it's not something you want to end up liable for! It's amazing how many companies out there look super solid from the outside but on the inside the truth is they are only hanging on by a thread.

If you do have the full picture then realistically unless your boss has already considered this and realises your value to the long term prospects of the company then they're unlikely to be that keen. One way to go about it would be to stick with a standard salary this year but build certain targets into your contract that gives you some equity and take it from there.

Everyone is replaceable in reality. When I started it was just the boss and 1 part time admin operating out of a very small office. They were in existence 5 years at that stage. After my first year we moved to a larger office and now 5 years later have 2 more admin staff and now also have 2 other part time 'consultant' type roles filled.

The boss is the one with 15+ years experience more than me, and he's the one with far more business contacts than me. He's also the more natural salesman so he brings in far more business than me. BUT, a good chunk of the stuff then gets handed off to me to deal with. So without me as his 'back up' he wouldn't be able to service all the clients.

I've also slowly but surely been building my own clients/ contacts but it's only a small proportion of the overall.

I like working there and have a lot of freedom to do my own thing day-to-day.

But i also have a young family and currently can't afford things like a pension or health insurance.

So just considering options for when the time comes to talk about things.

jimmii

Worth thinking about trying to get some equity if you see a good future for the place. Depending on how much value are attached to clients you could possibly say if I bring in x that adds y% increase to profits over so many years and in return you get a certain % equity.

Theres no obvious harm in asking but I would be going in with an outline proposal with targets and why that justifies equity. Hopefully they'll see it as you committing for the long term and appreciate it. If it comes to nothing this time at least it plants the seed and something could come of it in the future.

Without knowing the business, you and your boss it's hard to really say how good an idea it is and what the numbers would look like you and your boss would have to work out what is sensible for you both and the business. The only downside I could see would be how do you think it would effect your relationship if he completely rules it out?

All the best if you do go for it and make sure to pop back and let us know the outcome!

Gloomtastic!

tempnam wrote: »

Everyone is replaceable in reality. When I started it was just the boss and 1 part time admin operating out of a very small office. They were in existence 5 years at that stage. After my first year we moved to a larger office and now 5 years later have 2 more admin staff and now also have 2 other part time 'consultant' type roles filled.

The boss is the one with 15+ years experience more than me, and he's the one with far more business contacts than me. He's also the more natural salesman so he brings in far more business than me. BUT, a good chunk of the stuff then gets handed off to me to deal with. So without me as his 'back up' he wouldn't be able to service all the clients.

I've also slowly but surely been building my own clients/ contacts but it's only a small proportion of the overall.

I like working there and have a lot of freedom to do my own thing day-to-day.

But i also have a young family and currently can't afford things like a pension or health insurance.

So just considering options for when the time comes to talk about things.

Do you know if the business is profitable? Does it have borrowings/other sleeping partners/shareholders?

So if you went off and started a competitive business they would probably survive, where you may struggle.

If he gives you anything less than 50%, it could be worth nothing. He could re-invest all the profits back in the business forever and there's not much you can do about it.

No. 1 rule. If you don't ask, you don't get.

Sit down with him informally. Outline all the benefits you do bring to his company - the main one being he can trust you. Tell him, because of your young family, you're looking to the future and you'd like a pension, health insurance and if possible some equity in a business you enjoy working in.

He'll probably give you the first two - which is what you want, and should be happy with.

The equity part will be negotiable. Maybe you can buy into the business? Again, anything less than 50% may be worthless. Put it to him and see what he comes back with. Remember it won't be just his decision. There's probably his wife who will want her input. Has he kids? How will it affect them?

Put yourself in his shoes and think how you would react.

Trojan

tempnam wrote: »

he's the one with far more business contacts than me. He's also the more natural salesman so he brings in far more business than me. BUT, a good chunk of the stuff then gets handed off to me to deal with. So without me as his 'back up' he wouldn't be able to service all the clients.

Just a note on this: business development is generally a more valuable, harder to replace activity than operations in all but the most highly specialized businesses. That has several implications, one obviously being that you might not be in as strong as position as you think. But another might be that you could start to focus more on those tasks, bring in more business, and help to hire someone to do the implementation work that needs to be picked up from your changed priorities. That could significantly increase your value to the business.


Final piece of advice: go in well-armed with information, but humble and open to all ideas. Accept that he may not initially take to the idea, but given some time thinking about it, that could change later.

Best of luck with it, and please come back and update us with how it goes.

Calahonda52

Did not read all of this but this jumped out
I've also slowly but surely been building my own clients/ contacts but it's only a small proportion of the overall.
Be very careful in this space, especially with the new GDPR rules.
.
also
if you have no pension or health care your a**e is well out the window so I would forget about an equity stake at this stage, unless you have >50% he can screw you and it is worthless. I have been in this space for 47 years so have some miles on the radials.
You need salary

Diceicle

(Being devils advocate here but) OP, from your employers perspective why should he give you a good lump of equity without you buying into the business? Additionally, 50% of small business' close within the 1st 2 years - he was already 5 years in business before you set foot in the place so the basic foundations were already set....
Lets say he gives you equity - how do you see that working year on year? Do you divvy out profits or is it re-invested? Do you still get a raise like a standard employee?

Also, if this is something that is going to essentially come out of the blue for your employer - look at this scheduled meeting as the initial meeting - he may need a week or more to consider this proposal.

Lastly, what if he (outright) rejects the proposal?

Best of luck with it all.

Diceicle

Calahonda52 wrote: »

.....
if you have no pension or health care your a**e is well out the window so I would forget about an equity stake at this stage, unless you have >50% he can screw you and it is worthless. I have been in this space for 47 years so have some miles on the radials.
You need salary

On the >50% point. The owner is never going to make themselves the minority shareholder of their own business so surely that makes the whole 'equity' request pointless?
From the OP perspective I would assume they are looking for equity from a long-term and eventual passive-income perspective (maybe I'm wrong but thats how I would of looked at it). So when you say they can screw you. how so?

Tiddlypeeps

Something to think about is why you actually want equity. The growth of the company sounds very slow, do you expect it to start accelerating soon? If you were to get equity then realistically what kind of growth can you expect on it over the comping years?


I obviously don't have enough info to make any firm statements but based on what you have said so far it sounds like equity to you will only mean a chance at minor gains but also a decent chance of it either losing value or becoming worthless.


By receiving equity you will likely be getting it in place of all or part of a pay raise. So lets say you were due a 5k bump this year, but instead you choose to receive a chunk of equity. You are essentially paying 5k a year for that equity. Is it actually worth it?

listermint

Calahonda52 wrote: »

Did not read all of this but this jumped out
I've also slowly but surely been building my own clients/ contacts but it's only a small proportion of the overall.
Be very careful in this space, especially with the new GDPR rules.
.
also
if you have no pension or health care your a**e is well out the window so I would forget about an equity stake at this stage, unless you have >50% he can screw you and it is worthless. I have been in this space for 47 years so have some miles on the radials.
You need salary

I didnt read that as he is writing down contacts and clients. I read it as he is bringing in more customers and customer lists, which has nothing to do with GDPR what so ever. Im not even sure how GDPR popped into the thinking on that.

CIARAN_BOYLE

Diceicle wrote: »

So when you say they can screw you. how so?

If the majority owner decides to give himself a higher salary instead of paying dividends you ownership stake doesn't give you anything.

PickYourName

Gloomtastic! wrote: »

If he gives you anything less than 50%, it could be worth nothing. He could re-invest all the profits back in the business forever and there's not much you can do about it.

There's an assumption built into most (all?) of the responses in this thread that an equity stake has any value.

Except in very particular circumstances, minority shareholdings in private companies are worth nothing: who is going to give you cash for it, when and why?

Gloomtastic! wrote: »

No. 1 rule. If you don't ask, you don't get.

There are plenty of other things I'd ask for ahead if shares: the OP has mentioned a couple (pension etc.).

Gloomtastic! wrote: »

Sit down with him informally. Outline all the benefits you do bring to his company - the main one being he can trust you. Tell him, because of your young family, you're looking to the future and you'd like a pension, health insurance and if possible some equity in a business you enjoy working in.

He'll probably give you the first two - which is what you want, and should be happy with.

All good advice, except for the bit about asking for equity: why ask for something that's almost certainly valueless, yet the person who has it to give al,ost certainly doesn't want to part with?

Gloomtastic! wrote: »

The equity part will be negotiable. Maybe you can buy into the business?

Ask yourself a question: if I didn't work here, would I invest cash in the company in return for shares? If the answer is no (and it almost certainly should be), then why would you invest just becuase you happen to work there?

The chances of you realising any value in a minority shareholding are vanishingly small. The circumstances where it might happen are better dealt with by other means.

If by some chance you do want a shareholding, you'd almost certainly need some form of shareholder agreement and a board seat to protect your interest. The former costs and the latter opens you to a whole set of potential liabilities.

In case you haven't gathered, I think asking for a shareholding is a really, really bad idea......

antoinolachtnai

There is good advice above. The equity is not worth much if it isn't bought with a view to getting a controlling stake.

This all basically depends on the age of your boss. If he is near retirement, it may be tax-effective for him to sell the business to you. But this is a complicated thing.

If you can't afford the basic things you need for the family, then buying a business, particularly this business, may be the last thing you need to do.

I would say that that the way to move this all forward as a long term project is first to understand the financial position of the business better, with regard to profitability, the drivers of profitability, and the debt the business carries. This is a lot of work if you are not skilled in this area, but this is the bare minimum you need to understand to be able to even consider taking an equity stake.

ironclaw

To throw my two cents in the ring, and I'm not sure if it's been said, but are you after a larger salary or the wish to own a company with an equity stake? YOu can't do both, at least in the short term.

You can walk away from a job but you can't walk away too easily from a stake in a company, large or small. Being a director or holding shares complicates things from a lot of angles. Given how established the business is, I'd expect you to pay for a stake financially plus past sweat equity.

I'd only consider buying into a business if my long term goal was to either own it outright (or eventually hold the majority) or if the business had significant potential to be acquired. Both of those are long term, measured in years though.

You could hit a happy medium of a minor salary increase but a commission/bonus structure on the yearly profits. You are therefore rewarded for your effort into the business and if you banked the bonus, you could make an offer to buy out later on.

PickYourName

ironclaw wrote: »

You could hit a happy medium of a minor salary increase but a commission/bonus structure on the yearly profits. You are therefore rewarded for your effort into the business and if you banked the bonus, you could make an offer to buy out later on.

That's great advice - so much easier and more beneficial than a shareholding. It removes risk and downside for both parties and creates a win-win on the upside; always a much better place to aim for in any negotiation.

The only thing to watch is to tie any bonus or commission to something that's easily measured and not subject to arbitrary moves (in particular: in small companies net profit can vary a great deal, regardless of the underlying strength of the business).