Urgent help needed - investing in a private (unlisted company)

artyboy

Asking for a friend who has been given the opportunity to make an equity investment in their employer - it's a large-ish company with a number of real offices in the UK, accounts up to date etc... but it's not publicly listed.

So immediately high risk just on the basis of liquidity alone, but is there any specific process that needs to be followed in terms of any statutory disclosures, warnings etc? 

Apparently they want a quick answer, and have given a one liner astronomic return projection. So you can imagine what I'm thinking...

El_Torro

Might all be above board but it sounds pretty dodgy to me. 

My first thought, and maybe I'm being overly cynical, is that they're looking for some quick cash because they're in financial trouble. If that's the case it's definitely not the kind of company I'd want to invest in. Even if their return projections are crazy high.

masonic

What sort of arrangement is it? Sweet equity? Partnership shares? Something else? Can be very lucrative in the right circumstances and a very low monetary commitment from the employee. I made my best ever investment return from such an opportunity. But I have seen others that I had to pass on. The details really matter.

artyboy

masonic said:

What sort of arrangement is it? Sweet equity? Partnership shares? Something else? Can be very lucrative in the right circumstances and a very low monetary commitment from the employee. I made my best ever investment return from such an opportunity. But I have seen others that I had to pass on. The details really matter.

More to follow... I guess I'm just naturally suspicious, from a career in financial crime controls!

DRS1

Presumably your friend knows better than any of us whether this is a good deal or a rip off.  Some random thoughts:

Is the investment an amount he can afford to lose?  Would he be taking out a second mortgage?

What form do the returns take?  Regular dividends from the outset or a sale some years in the future to some mythical buyer?  What do they say about liquidity in the meantime or what happens if he leaves?  Are there compulsory sale provisions - good leaver bad leaver?  An EBT?

Is he the only employee getting this offer or is everyone getting it?

Will there be a shareholders agreement?  Has he read the Articles of the Company?

What do the accounts suggest about the finances of the company?

Have they had a share valuation and is he expected to pay fair market value or is he getting the shares at less than that because he is an employee?  Will there be any tax involved on any undervalue?

Has the company thought about setting up a Revenue approved share option scheme and granting him an option instead of selling him the shares right now.  The option could be exercisable when the mythical buyer comes knocking.  No need for any payment now (but private companies cannot always meet the requirements for an approved option scheme).

RogerPensionGuy

Can I suggest the opening poster signposts the person getting this offer on to this MSE sight and they can read up and ask questions here. 

The offering sounds a bit like that old phrase about if it sounds too good to be e true, maybe it is, beware. 

QrizB

artyboy said:

So immediately high risk just on the basis of liquidity alone ...

It's also risky to invest any significant money in your own employer, since if they go bust not only are you redundant but you lose your investment.

On the other hand, your friend might be in a position to know whether the employer's business is growing fast enough for the "astronomic return projection" to be credible. What do they think of the business's prospects?

Alexland

What's the urgency? Are they going bust or do they not want to give your friend time to think, research or get advice? If they are asking for lots of money upfront then sounds fishy.

artyboy

DRS1 said:

Presumably your friend knows better than any of us whether this is a good deal or a rip off.  Some random thoughts:

Is the investment an amount he can afford to lose?  Would he be taking out a second mortgage?

What form do the returns take?  Regular dividends from the outset or a sale some years in the future to some mythical buyer?  What do they say about liquidity in the meantime or what happens if he leaves?  Are there compulsory sale provisions - good leaver bad leaver?  An EBT?

Is he the only employee getting this offer or is everyone getting it?

Will there be a shareholders agreement?  Has he read the Articles of the Company?

What do the accounts suggest about the finances of the company?

Have they had a share valuation and is he expected to pay fair market value or is he getting the shares at less than that because he is an employee?  Will there be any tax involved on any undervalue?

Has the company thought about setting up a Revenue approved share option scheme and granting him an option instead of selling him the shares right now.  The option could be exercisable when the mythical buyer comes knocking.  No need for any payment now (but private companies cannot always meet the requirements for an approved option scheme).

All good questions that are being sent back in their direction. But as you say, the first point you made is the key one here...

artyboy

QrizB said:

artyboy said:

So immediately high risk just on the basis of liquidity alone ...

It's also risky to invest any significant money in your own employer, since if they go bust not only are you redundant but you lose your investment.

On the other hand, your friend might be in a position to know whether the employer's business is growing fast enough for the "astronomic return projection" to be credible. What do they think of the business's prospects?

Well as they are an accountant, you might wonder why I'm even getting asked... doubly so as I invested in a previous employer that most definitely and very conspicuously went bust!

artyboy

Alexland said:

What's the urgency? Are they going bust or do they not want to give your friend time to think, research or get advice? If they are asking for lots of money upfront then sounds fishy.

Yes, it's a quick decision and ask for money. It could just be that they have suddenly been considered senior enough to take part in a scheme that others have known about for longer and just happens to now have a short deadline. And although these things are always subjective, it doesn't sound like a lot of money here. Could just be some sort of golden handcuffs arrangement.

I suppose I'm just more used to 'official' share schemes with plenty of upfront information, warnings, and regulatory paperwork. Not that they have always ended well!