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

Bostonerimus1

Unlisted company shares are only worth something if you can sell them - and that can be difficult. I would not buy shares in where I worked after seeing numerous people lose money in small company employee equity schemes that were sold with rosy projections.

Hoenir

Need to know a lot lot more before passing comment. These events don't just happen. An enormous amount of work will have done into this if it's a sizable business. 

Eyeful

If a large company I worked for had offered me shares in that company but the shares are illiquid & they wanted an answer quickly, 
my first thought would be no, is this a Red Flag signal.

1. If it looks to good to be true, its because you do not understand the risks.
2, Remember ERON. Large public USA company, with lots of eyes on it. Unexpectedly went bust.
3. Never invest in the company you work for. If it goes down, you lose both your job & money to pay the bills!

If artyboy ever gets answers to DRS1 question, perhaps he would let us know them.

MDMD

The senior staff where I work are issued shares in private entities in the group. They pay “market value” for the shares but it’s often a very low amount they put in. 

The company only sells a very small percentage to them (to keep the subscription amount low) so it’s not going to generate a lot of funds for the company. In fact the legal and professional costs often are more than the people put in. 

Their joint incentive is if they grow the business and the business is sold for a good profit, both the staff and the investors make money.

There can often be tax elections (usually section 431) which have very strict deadlines (14 days). Missing these can be detrimental to the employee, which may be why there’s an urgency.  The company make signing this a condition of being in the scheme.


https://www.weightmans.com/insights/section-431-elections/

Eyeful

MDMD
When owners of a business use such a complicated way to incentivise staff, I can not help thinking, there is much more in it for the owners than the staff.

DRS1

Well to be fair if there was nothing in it for the owners they wouldn't bother with the incentive scheme.
What MDMD describes is used where the employee is only involved in one subsidiary enterprise where it makes more sense to get them financially involved in the performance of that subsidiary than if you awarded them shares in the TopCo.  It is very useful if TopCo has a habit of spinning off the subsidiaries by selling them to third parties or listing them on a stock exchange. 

masonic

The main benefit to the company is that key personnel the business believes will make a substantial contribution over the next few years have to give up something valuable if they decide to pursue their career elsewhere, and it also makes some of their remuneration loosely results driven (i.e. a nice payout if and only if the company meets its growth targets and existing investors exit).

If it just requires a few hundred pounds to be deducted from pre-tax wages, with the potential of a 5-figure payout in a few years time, then you'd have to have very little faith in your employer's prospects not to take the punt. But in general the larger the company, the more that would need to be put in and the lower the return that could be expected.

london21

Urgency is a red flag.

Investing in a private, unlisted company can indeed be risky, especially when it comes to liquidity and transparency. However, if your friend is considering this opportunity, it's crucial to follow a thorough process to ensure they make an informed decision.

Here are some steps your friend should take:

1. Request detailed information: Ask the employer for a comprehensive investment deck, business plan, and financial projections. This should include historical financial statements, management structure, and potential risks involved in the investment.
2. Assess the company's potential: Analyze the company's growth prospects, competitive landscape, and market position. If possible, your friend should consult with an industry expert to gain a better understanding of the company's prospects.
3. Understand the investment terms: Review the investment terms carefully, including the type of shares offered (ordinary or preference shares), the expected return, dividend policy, and any exit strategy for the investment.
4. Seek professional advice: Consult with a financial advisor or legal professional to review the investment proposal and ensure your friend's interests are protected. They can also help your friend understand any tax implications of the investment.
5. Evaluate the return projection: A one-liner return projection is not sufficient. Request detailed financial modeling and assumptions behind the projection, and evaluate it with a critical eye. Overly optimistic projections might be a red flag.
6. Be cautious of time pressure: While the employer might want a quick answer, your friend should take their time to conduct due diligence and not rush into a decision.

As for statutory disclosures and warnings, since the company is not publicly listed, it's not subject to the same stringent requirements as public companies. However, it should still provide sufficient information to allow investors to make informed decisions.

Remember, investing in a private company carries inherent risks, including the possibility of losing the entire investment. Your friend should be comfortable with the level of risk involved and not invest more than they can afford to lose.

artyboy

No updates yet, but I am seeing them at the weekend so will find out what more they know then (if not before) - thank you all for the comments and suggested questions...

artyboy

Realised I never came back to this... anyway, turns out that the urgency was just to provide an indication of interest, that then released a lot more comprehensive information. I'm not privvy to much of it, but it sounded like at least the right sort of disclosures were being made and that it was a structured scheme.

i think they are going ahead with it. Its 'only' about a month's salary worth anyway, so the downside is pretty limited.