Valuation of a business

Malthusian

BartyBoy wrote: »

Based on that, I may as well just be a 9 till 5 worker, because anything that I do extra will not be taken into account for a pay rise, why should I work extra then, right?

I think what the other directors are driving at by "concentrate on bringing in profit" is that anything you do extra, if it makes a profit for the company, will benefit you whether you get paid directly for it or not. Because it increases the value of your share of the company. Say that I'm a sole director and I own 100% of my company, and I bring in a new client that increases profit and makes the company worth £1 million. I could pay myself £100,000 as a reward but then instead of owning a company worth £1 million I own a company worth £900,000 and cash of £100,000, minus my tax bill. So I don't need to be directly remunerated to be motivated to bring in profit; in fact I am equally motivated even if I only pay myself about £7k a year to qualify for National Insurance.

However the problem in your case is that you are a 20% shareholder and while every hour you work without direct reward benefits you via your shareholding, it benefits others by 4x as much. If I go into business with someone else and we're equal 50% directors then this still works, but only if each of us are pulling our weight equally - and trust each other to do so. If you have five directors with 20% shares then it gets messy, as it seems highly unlikely that five people will ever be contributing equally to the business.

Two questions:

1) If you took a new job could you hold on to your 20% shareholding, or is there a "bad leaver" provision in the shareholders' agreement that would force you to forfeit it?

2) Would you be able to live with the dividend income stopping if you got a new job as an employee? (As it seems likely that this may happen whether or not you hold on to your shares.)

BartyBoy

Malthusian wrote: »

However the problem in your case is that you are a 20% shareholder and while every hour you work without direct reward benefits you via your shareholding, it benefits others by 4x as much. If I go into business with someone else and we're equal 50% directors then this still works, but only if each of us are pulling our weight equally - and trust each other to do so. If you have five directors with 20% shares then it gets messy, as it seems highly unlikely that five people will ever be contributing equally to the business.

That probably explains why I am so obsessed and determined about this pay rise situation. The other 4 directors used to make a great effort to work hard for the business, but since we started dishing out the dividends from Year 4, I can see they are making less effort to the business. It's very well to them to have an easy life because they are now taking £50K+ home every year, while I am working my socks off and my take-home-income is nowhere near to theirs.