Advice needed on 'profit share investment' offered by employer

liftandshift

Hi guys!

I've just joined today to ask for some advice on something that has been offered to me recently by my employer.

I work in the far east for a small company that employs about 8 staff. We currently get paid a percentage of the hourly fee that the company charges. Let's say we charge 60 dollars and hour, we get 35 dollars of this.

We recently moved from a small premises to a large one and business has boomed. We're all doing a lot of hours and earning decent money, but are paid like freelance. If we don't work we don't get paid.

I've enquired with my boss about investing, becoming a part of it and helping it grow together. He has said he's very wary about losing any control of the company. This has got me thinking about going freelance or setting up my own business of the same nature. I'm an ambitious guy and don't want to be working for my boss for the next 10 years. In this line of work it would be very easy to go freelance and take the full $60 hourly rate but stream of clients would be less secure and I love working at this place.

As we're expanding he can see the value of holding onto us. He has recognized that the business is the staff, us, not the materials or location of the business. Our experience is hugely important, valuable and integral to the business. Therefore he has offered this 'incentive' to us and I am very unsure about it. I would love your opinion and advice:

For an initial investment of $7000 (admittedly a fairly small amount) he will give us 2% of the company profits. The contract will last 3 years and if we leave we will get the 2% for 3 years regardless. If we stay beyond 3 years we will receive the 2% while we remain employed by the company. So if we stay 8 years we will continue to get the 2% with no extra investment. This will be after all outgoings, our salary, his salary, rent etc. He says he will be totally transparent with incomings, outgoings, all accounts etc.

At the current profit rate I will get back $7500 over the 3 years. We are expanding our current location and this could mean increased profits, but possibly less.

He has sent us a contract, with two points of interest:

1. The employer agrees to pay the employee an incentive salary equal to 2% (two percent) of the net profits of the company for the fiscal year, subject to a maximum of [specify the maximum amount of incentive salary payable in figures and words if you want to put a maximum cap on the payment].

8. The employer has the right to discontinue this agreement, or alter the terms and conditions at any time at its discretion, by providing the employee with a notice of 30 days of the intention to do so.

My thoughts and concerns:

- I don't really want to pay for profit share. I will pay for a share of the company that can be resold and make me feel like some of the company is mine, which it will be. I feel profit share should just be offered, or a bonus if the company hits a certain target.
- It seems to be very good for my boss. He raises $35,000 (this has been offered to 5 people) without really any risk on his part or giving up any of the business. He's sold this to us as a 'gift'.
- the business, although doing well now, is vulnerable to staff leaving or something happening to the market in this reasonable volatile country.
- it ties me in long term to make good gains without really offering me enough to satisfy my ambitions.
- it could create a strange work dynamic. Will we be expected to do more work unpaid as "the company is partly yours now, guys!"
- what happens if the company is sold? He said the money would be returned to us if it's in the 3 year contract period

I would love your input on:

- Is it common place to ask employees to pay for profit share? Is this really an incentive or a 'gift' as he puts it?
- I kind of trust him, he's a good friend of mine, but I can't absolutely say I trust him implicitly. He's quite shrewd and often sells things to us as beneficial, when really they only benefit him. My concern is that later the rules will change. Term 8 obviously allows this.
- any other general thoughts. Is it a good offer I should consider or is he taking the !!!!?

Thanks so much in advance. If anything is unclear please feel free to ask.

paddyrg

This is really a UK Forum so local conditions will not be the same

That said the deal sounds a bit of a dud to me, quite a lot of risk, not a massive payoff. Better of buying shares which at least have a formalstructure and generations of company law behind them.

HiMyNameIsLauren

"In this line of work it would be very easy to go freelance and take the full $60 hourly rate but stream of clients would be less secure and I love working at this place." - what does your contract say? I, personally, set-up my own business after working for someone else for several years and I was very open with my employer at the time for what my intentions were. So, I grew my business (in my own time), while still being employed and then we came to an amicable date for when I'd leave. This way, low risk for you (as a start-up) and then in good shape for when you finally leave. Just, don't be a !!!!!! and poach current customer base and again, be careful what is in your contract.

Annisele

liftandshift wrote: »

At the current profit rate I will get back $7500 over the 3 years. We are expanding our current location and this could mean increased profits, but possibly less.

So, maximum loss is $7,000 plus whatever interest you'd have been able to earn if you'd put the money elsewhere. An an interest rate of, say, 2.33%, you'd get $7,500 at the end of three years.

The gain you're estimating is $500.

That's a terrible deal.

(I've completely ignored tax in the above, as I don't know how it works where you are - but I think it's going to be a fundamentally bad deal whatever the tax situation).

CKhalvashi

HiMyNameIsLauren wrote: »

"In this line of work it would be very easy to go freelance and take the full $60 hourly rate but stream of clients would be less secure and I love working at this place." - what does your contract say? I, personally, set-up my own business after working for someone else for several years and I was very open with my employer at the time for what my intentions were. So, I grew my business (in my own time), while still being employed and then we came to an amicable date for when I'd leave. This way, low risk for you (as a start-up) and then in good shape for when you finally leave. Just, don't be a !!!!!! and poach current customer base and again, be careful what is in your contract.

I did the same, and was also open about what I was doing, especially as I was rotating between bringing a car/van into work, and I was teaching.

As mentioned above, don't poach the client base of your existing employer, as that's the fastest way out the job.

CK

Brassedoff

Reading your summary and doing the sums I would be less inclined to say yes if I was yor advisor. The risk does not reflect the reward and to be honest, if you are looking at a profit share it will be nothing once you've taken EBITA into account.

I would go to him, ask for a more formal Freelance agreement, or better still a JV based on your activity.

It would help if we could know what dominion you are in as the law and tax vary. Plus you say $ is that USD$