Handing out shares in a startup

paddyrg

As a former worker on the 'coding face', I totally get what you're talking about. You need to clarify what is on offer is 10% (quite high for 5 days work!) of the shares in the company, but that those share are not publicly traded so the value of them is all in growth if you sell the company. Your mate should understand that is not the same as getting a cheque each month based on 10% of the GP (which is a harder deal to administrate and police - probably outweighing the actual value of the cheques).

If he isn't interested, find someone who is. We've all been there and tried that as a punt for startups, and got worthless shares to show for it. But then some projects take off, which is why we take the punt in the first place!

One thing I would advise though is not working with friends - friendships come under enormous stress when business/money is concerned.

skeen08

paddyrg wrote: »

As a former worker on the 'coding face', I totally get what you're talking about. You need to clarify what is on offer is 10% (quite high for 5 days work!) of the shares in the company, but that those share are not publicly traded so the value of them is all in growth if you sell the company. Your mate should understand that is not the same as getting a cheque each month based on 10% of the GP (which is a harder deal to administrate and police - probably outweighing the actual value of the cheques).

Right? Thought I was going crazy there for a moment! I'd say it's a damn good deal!

If he isn't interested, find someone who is. We've all been there and tried that as a punt for startups, and got worthless shares to show for it. But then some projects take off, which is why we take the punt in the first place!

I spoke to him last night and he seems happy with this arrangement. This is certainly the way I had intended things to go...giving a monthly, or yearly percentage of the profit makes literally no sense to me for such a small time investment, in my view.

However, if the business gets to a stage where it is worth enough money to sell it, then I am happy to share in that success with the people who helped me to found it. It's as simple as that.

Thanks so much for your help so far, everyone

I am still a little concerned as to how I should word this kind of agreement. What is this kind of a share holding called, exactly? Because as we move forward, and more of my co-founders contribute to the launch of this business, I would like to give them the exact same kind of shares.

paddyrg

See an accountant, even if you take advice, do the work yourself, and ask them to check it. Sounds like you need to form a limited company, issue shares, and assign your friend some - this is all very tried and tested legally and process-wise, so get it right. If you want to get fancy, look at different share classes to cover voting rights, etc but take advice.

skeen08

paddyrg wrote: »

See an accountant, even if you take advice, do the work yourself, and ask them to check it. Sounds like you need to form a limited company, issue shares, and assign your friend some - this is all very tried and tested legally and process-wise, so get it right. If you want to get fancy, look at different share classes to cover voting rights, etc but take advice.

Thank you

Annisele

skeen08 wrote: »

I am still a little concerned as to how I should word this kind of agreement. What is this kind of a share holding called, exactly? Because as we move forward, and more of my co-founders contribute to the launch of this business, I would like to give them the exact same kind of shares.

You can call them whatever you like. For example, you can have Class A shares and Class B shares (or whatever), you just have to define what they are.

You need to think about things like whether the shares will carry voting rights, whether you'll have any provisions that new shares must be offered to existing shareholders (to restrict dilution of their shareholding) - in other words, you need a lawyer

However, I still think that this doesn't sound like a very good deal for your friend. In his position, I'd be thinking that if you really believed that your company was going to succeed, then you wouldn't be offering me 10% of it for five days work - unless you planned to dilute my shareholding in the future, in which case you might as well be offering me 0.0000001% of it.

seismicryan

It is very simple to understand... if you give him 10% it means that whenever you pay a dividend, you must pay him 10% of the total dividend. Or, if you sold the company, he would get 10% of the sale price. That's it. He is getting 10% of the profits, so to speak, but not every time a little bit of profit is made, which sounds like what he was thinking.

Depending on the value of the work he is doing, this could cost you A LOT. Imagin if your company sold for £1M in a few years, and you had to give him £100,000.. thats a lot to give away for a few days work right at the start.

In my opinion, you would be better agreeing a price with him for his work and then arrange to pay him once you are up and running... a loan rather than an investment on his part, basically.

Ryan

somethingcorporate

Agreed that 10% is sheer lunacy if you think this idea is a goer especially for 5 days work. I would pay him a couple of grand and move on once he is done!

paddyrg

I would suggest it was for more than 5 days, but to define, design, code, implement into production, maintain, and provide support and bugfixes for the core functionality - plus some kind of (hehehe) documentation. If that could be done in 5 days, corners have been cut or the task is trivial.

Just to give some context, some senior architect/dev fellows I know don't bother for under 25% of the company - that is because so many go duff, that you have to hedge massively. Almost all (just shy of 100%, I'd reckon) of startups go titsup. Those that manage to sell before turning a profit (youtube for instance) make creators some good cash, but most will fizzle or dead-end.

I would take the cash over equity any day, but that comes with "fifteen times bitten, sixteenth time shy" of experience. At the moment the equity is worth nothing, and anything higher is an overvaluation (not that most web companies aren't overvalued!). Equity to make him a partner to provide the full service, or a grand to sort your tech out in a week, at the moment it feels a bit between two stools.

motorguy

seismicryan wrote: »

It is very simple to understand... if you give him 10% it means that whenever you pay a dividend, you must pay him 10% of the total dividend. Or, if you sold the company, he would get 10% of the sale price. That's it. He is getting 10% of the profits, so to speak, but not every time a little bit of profit is made, which sounds like what he was thinking.

Depending on the value of the work he is doing, this could cost you A LOT. Imagin if your company sold for £1M in a few years, and you had to give him £100,000.. thats a lot to give away for a few days work right at the start.

In my opinion, you would be better agreeing a price with him for his work and then arrange to pay him once you are up and running... a loan rather than an investment on his part, basically.

Ryan

+1

The O/P is giving away a lot for very little return - unless of course he knows its never going to amount to anything?

I've a little startup going that is making me a nice amount of money each week and has real potential. Wild horses wouldnt make me give away 10% of my future hard earned for a few days coding.