Selling shares in a company - can anyone help

max00d

Hi my issue is rather a specific one and I'm not sure I have put it in the correct category. If it is misplaced then I appologise. However, if anyone can help shed some light on my predicament I would be extremely grateful.

I am writing to get clarification on a matter concerning selling and equity stake in a company. My situation:

An acquaintance set up a start up company last year. He approached me and asked me if I would be interested in joining him. He agreed to sell me a 25% equity share in the company for the sum of £20,000. During the first six month I helped with work and instead of getting paid we agreed to keep track of all work done and this would count towards the 'buy-in'. In April of 2014 I produced evidence of work done that totaled around £9,500. We then agreed that I would pay an additional £10,000 and in return he signed over 25% of the company to me.

A few months later he approached me asking if he could buy back the 25% share. We then agreed that the company was probably worth a little more and I agreed to sell back the 25% for the sum of £21,000.

He has now paid me back the sum of £10,000. But is now demanding invoices to account for the work done that served as the additional part of the buy-in. This was never discussed up front or at the time of him signing over the 25% share to me in April.

I can produce a spreadsheet that we kept track and formed part of the original agreement. However, I do not know if this has any bearing on the further £11,000 that is outstanding with respect to him buying back the shares.

In my mind this feels like two separate and distinct transactions and how I acquired the company should have no bearing on how i sell the company. I am in a position to demand the outstanding £11,000 from him.

paddyrg

I'd suggest the small biz forum might be handy for you

max00d

Thank you very much. Apologies but I didn't see that when I first looked around.

bowlhead99

So why don't you give him an invoice for the value of the work that you said you did for him and had agreed on the spreadsheet. You said the spreadsheet, which you can still produce, kept track of the work and formed part of the original agreement. Did the company issue new shares to you? It seems reasonable that the company on issuing you some shares would request an invoice for this and then it is clear what consideration you are giving for the shares. Alternatively if the company didn't issue any shares to you, but he just assigned you some of his existing shares, then it seems a bit like you were doing the work for him, rather than the company, because it's him that's giving something up to let you in. Who does he want the invoices issued to? Did the shares ever actually get put into your name?

I would agree that yes, if the buy-in was fully documented then the buy-out can be dealt with separately. But if the company has not kept records, perhaps you don't even have any shares, making it rather difficult to sell.

If you do have a contract or agreement to sell the shares that were validly issued to you and fully paid-up, to him, for £21k, then he needs to fulfil the contract and give you the £21k - else the contract is not fulfilled and you can return his £10k, keep all the shares that you have and think about a new contract for a different amount of shares and/or a different price.

As with everything in business though you may find you have different views which is why documentation is important. If the documentation is in good shape then in theory you can take him to court, but in practice if you only have a verbal agreement for the sale he can decide not to go through with the sale at that price and then leave you with 25% of a private company which may ultimately be worthless.

max00d

Thanks for the repsonse bowlhead99. I do have a stock transfer form that has my acquaintances signature on it dated the 9th April and he is names as the shareholder. I also have a copy of the email that was sent to our accountants asking to distribute 25% of the equity into my name as a company director.

I also signed a similar stock transfer form with the amount for £21,000 on it (although I do not have a copy of this unfortunately, can I demand a copy of this?) dated for the end of July.

As to why I don't invoice - this is because he wants to invoice the company. He would then be able to pay this off via the company and not use his personal tax amount by withdrawing from the company as a director and then paying me. However, as you point I did not do this work for the company I did it for him as a favor to enable him to build up a client base without having to pay additional wages out.

As you can probably work out relationships have deteriorated and I really want to know how I stand in relation to the law, and being able to demand the payment.

Thrugelmir

The invoice is required in order to create a liability within the Company. This liability can then be converted into the issued share capital.

max00d

The invoice is required in order to create a liability within the Company. This liability can then be converted into the issued share capital.

What exactly does this mean then? That the shares don't exist? That they were not correctly transferred to me in the first place?

Who would I address the invoice to? I am assuming it would not be the company, but the individual. And what are the implications for issuing an invoice that is for a figure that is below the 11k this is still owed to me?

Sorry to ask so many questions after you both have already been extremely helpful.

bowlhead99

max00d wrote: »

As to why I don't invoice - this is because he wants to invoice the company. He would then be able to pay this off via the company and not use his personal tax amount by withdrawing from the company as a director and then paying me. However, as you point I did not do this work for the company I did it for him as a favor to enable him to build up a client base without having to pay additional wages out.

You are saying you did it for him as a 'favor' but then you are talking about not having to pay wages out. Would it not be the company that avoided having to pay wages out? As presumably it is the company who would be doing the employing as his business was or is now a corporate structure?

The way you described it, it wasn't a favour, it was almost £10k of work which you provided to him/the company so that they would give you £20,000 'worth' of shares while only requiring a £10,000 cash contribution? So effectively he arranges for him/his company to give you the other £10k of shares for the ~£10k of consultancy work / development work / marketing work etc etc that you had provided and for which he or it owed you.

Are you sure that the reason you don't want to issue your invoice to anyone isn't simply to help you to avoid your own tax liabilities for the £10k of work for which you're expecting to be remuerated? Rather than being some altruistic HMRC-helping crusade to make it as difficult as possible for him to structure your buyin transaction tax efficiently from his/his company's perspective?

max00d

bowlhead99 wrote: »

You are saying you did it for him as a 'favor' but then you are talking about not having to pay wages out. Would it not be the company that avoided having to pay wages out? As presumably it is the company who would be doing the employing as his business was or is now a corporate structure?

The way you described it, it wasn't a favour, it was almost £10k of work which you provided to him/the company so that they would give you £20,000 'worth' of shares while only requiring a £10,000 cash contribution? So effectively he arranges for him/his company to give you the other £10k of shares for the ~£10k of consultancy work / development work / marketing work etc etc that you had provided and for which he or it owed you.

Are you sure that the reason you don't want to issue your invoice to anyone isn't simply to help you to avoid your own tax liabilities for the £10k of work for which you're expecting to be remuerated? Rather than being some altruistic HMRC-helping crusade to make it as difficult as possible for him to structure your buyin transaction tax efficiently from his/his company's perspective?

When you put it like that it appears that it the heat of the situation I have not put my rational 'head on'. what you say does make complete sense. Thank you.

bowlhead99

max00d wrote: »

And what are the implications for issuing an invoice that is for a figure that is below the 11k this is still owed to me?

The £11k does not need to match with whatever work you did up front because the £11k relates to the exit value he's paying you off with for what the shares were worth when you left the company, not what you paid for them when you joined the company.

As we understand it, you'd agreed to pay about £20k for a number of shares that equated to 25% of the company.

In the end you did what you thought was about £9.5k worth of work and paid £10k in cash and he allowed you to have the 25% of the company shares anyway. So either you are saying the work was worth £9.5k and you should invoice £9.5k and he has effectively let you off with only paying £19.5k for the shares, or you and he are agreeing that the work was worth £10k and you have paid £20k for the shares.

Then on exit we are saying that the company became a little more valuable and you are selling the shares for £21k, of which you've been paid £10k and are waiting for the other £11k.

Depending whether you agree the work was worth £10k or £9.5k, you will have income of £10k or £9.5k and a total cost of buying the shares of £20k or £19.5k. Then when selling for £21k you will have a £1k capital gain or a £1.5k capital gain. (both of which are likely to be within your annual capital gains allowance).

It would seem to be preferable to say the work was valued at £9.5k than £10k as presumably that gives you lower taxable income and you have a spreadsheet of work done which supports it. However if he has already done the paperwork for the share issuance and had only allocated the shares on the assumption that you had given him £10k worth of work then maybe he will be expecting invoices for £10k.

Of course, I'm not a tax professional or practicing as an accountant here, I'm just some guy on the internet so take it with a pinch of salt and consider professional advice if necessary.

Thrugelmir

max00d wrote: »

What exactly does this mean then? That the shares don't exist? That they were not correctly transferred to me in the first place?

I suspect that your ex partner has "messed" up and is backtracking to put his accounts into order.