Equity instead of full salary

PeeJay6969

The scenario is I have been offered a permanent job with a tech startup on a salary that is about 15% of the amount the role should be paying, with a 2% stake as shares in the company. I’ve worked for them as a consultant for the past 11 months, and when the offer was made to me the company was valued at £3 million (for a seed funding round).

Last week, it was valued at £30 million, so that’s £600k In shares they owe me.
my question is, what’s the process for being paid in shares that aren’t easily sold at the moment (As there isn’t an IPO planned), and are there any legal options for getting them off shore to avoid CGT When they are sold?

I have dual nationality, am British by marriage But South American by birth.

thanks in advance

Manxman_in_exile

I think I'd be looking for proper paid for professional advice from a solicitor or an accountant if I were you.

LittleVoice

PeeJay6969 said:

The scenario is I have been offered a permanent job with a tech startup on a salary that is about 15% of the amount the role should be paying, with a 2% stake as shares in the company. I’ve worked for them as a consultant for the past 11 months, and when the offer was made to me the company was valued at £3 million (for a seed funding round).

Last week, it was valued at £30 million, so that’s £600k In shares they owe me.
my question is, what’s the process for being paid in shares that aren’t easily sold at the moment (As there isn’t an IPO planned), and are there any legal options for getting them off shore to avoid CGT When they are sold?

I have dual nationality, am British by marriage But South American by birth.

thanks in advance

Did you accept the offer?


If you fulfilled the conditions, did they issue the shares to you?  That's the piece of paper, not £600K.

Manxman_in_exile

LittleVoice said:

PeeJay6969 said:

The scenario is I have been offered a permanent job with a tech startup on a salary that is about 15% of the amount the role should be paying, with a 2% stake as shares in the company. I’ve worked for them as a consultant for the past 11 months, and when the offer was made to me the company was valued at £3 million (for a seed funding round).

Last week, it was valued at £30 million, so that’s £600k In shares they owe me.
my question is, what’s the process for being paid in shares that aren’t easily sold at the moment (As there isn’t an IPO planned), and are there any legal options for getting them off shore to avoid CGT When they are sold?

I have dual nationality, am British by marriage But South American by birth.

thanks in advance

Did you accept the offer?


If you fulfilled the conditions, did they issue the shares to you?  That's the piece of paper, not £600K.

I wondered that as well!  It's all very well the company being worth £3 million at the time of the offer, but the OP doesn't say if they accepted it before it went up to £30 million.  If I were the owner(s) I'd be tempted to withdraw the offer if not accepted and pay a proper salary!

sharpe106

What a company is valued at for seed funding round and what a company actually is worth is two completely different things.

Dox

Sounds like a typical Dragons Den hopelessly overvalued start up. Do they have solid contracts and definite income streams which will generate short term profits of £30m? Thought not. Dream on.

Brynsam

PeeJay6969 said:

The scenario is I have been offered a permanent job with a tech startup on a salary that is about 15% of the amount the role should be paying, with a 2% stake as shares in the company. I’ve worked for them as a consultant for the past 11 months, and when the offer was made to me the company was valued at £3 million (for a seed funding round).

Last week, it was valued at £30 million, so that’s £600k In shares they owe me.
my question is, what’s the process for being paid in shares that aren’t easily sold at the moment (As there isn’t an IPO planned), and are there any legal options for getting them off shore to avoid CGT When they are sold?

I have dual nationality, am British by marriage But South American by birth.

And presumably incurably optimistic about offers which are too good to be true? Does this miniature salary comply with minimum wage requirements? 

You say you 'have been offered' - did you accept before the company miraculously went up in value by an order of magnitude?

The process for selling shares will depend on three things: the company's Articles of Association; your agreement with the company; and finding some mug to buy them at such a wild over-valuation. Who dreamed up the £30m? What are the company's assets/IP/order book looking like?

steampowered

If you are simply given shares for working at a company, that will trigger an income tax charge when the shares are issued. So if you are given £600k of shares that won't be far off a £300k tax charge.

It is more likely that you will in fact be given EMI options. Those options will have an exercise price (aka strike price on them). So, the 2% of the company is actually worth £600k minus whatever the strike price would be. 

The options could be worth a few hundred thousand when the company is sold, with extremely favourable tax treatment if they are EMI options (no need to move offshore to get a great tax deal!) or they could be worth nothing - that's the risk you take.

The other important thing to bear in mind is that the options may be forfeit if you decide to leave the company before an exit. Ask what the leaver terms are. Obviously that's a bit different to salary - you keep your salary when you leave!

PeeJay6969

Thanks for all the replies.
just for some info on the comments, the company valuation came from potential investors own research, not our own valuation.

I’m aware that the 2% is worth zero until someone is willing to buy it.
The share of the company is in the employment contract and will be distributed via share certificate when the major investment is completed in mid August.
the mechanics of allocating the shares is where my concern is, as I don’t want it to be via payroll, as I don’t have the funds to underwrite the PAYE liability and neither do the company.

I just wanted a basic overview of what happens rather than pin point accurate advice at this stage.
Thanks again.

PeeJay6969

steampowered said:

If you are simply given shares for working at a company, that will trigger an income tax charge when the shares are issued. So if you are given £600k of shares that won't be far off a £300k tax charge.

It is more likely that you will in fact be given EMI options. Those options will have an exercise price (aka strike price on them). So, the 2% of the company is actually worth £600k minus whatever the strike price would be. 

The options could be worth a few hundred thousand when the company is sold, with extremely favourable tax treatment if they are EMI options (no need to move offshore to get a great tax deal!) or they could be worth nothing - that's the risk you take.

The other important thing to bear in mind is that the options may be forfeit if you decide to leave the company before an exit. Ask what the leaver terms are. Obviously that's a bit different to salary - you keep your salary when you leave!

Thanks.
Sounds like sound advice. I just want to make sure a good tax efficient process is followed.
I also have 1% personally invested via SEIS/EIS but am waiting for the certificates after the company spends the appropriate amount from that investment round.

Middlestitch

PeeJay6969 said:

the mechanics of allocating the shares is where my concern is, as I don’t want it to be via payroll, as I don’t have the funds to underwrite the PAYE liability and neither do the company.

I just wanted a basic overview of what happens rather than pin point accurate advice at this stage.

There are various ways of setting up share schemes for employees and that's precisely  the sort of information the company should be giving you. If they are simply giving you 2% equity via your contract of employment, to say that sounds amateurish is something of an understatement. Have you asked for full details? Do you know what sort of shares you're getting - are they all the same class of share, or is this some sort of special issue, on less preferential terms than the major investor is getting?

What happens in year 2 - do you get the 'correct' level of salary? All these things need to be set out in your contract so there can be no arguments if things don't go to plan.

15% of the 'correct' salary looks very low. To meet minimum wage requirements that needs to be about £15,000, so you are saying the role is worth £100K. Factor in salary related perks such as pension contributions, and the fact the employer doesn't need to pay employer's NI, and you are effectively subsidising the start up to the tune of £125K+ a year. If other hires are doing the same, it isn't hard to see why investors (who might have insisted this route was the one to be followed, and have their own investments underwritten by a charge over company assets) would be willing to bump up the valuation.

I trust you undertook/will undertake the proper due diligence and take professional advice before signing up to this sort of deal.