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I work for a small Limited company in the UK that's owned 100% by the MD. I'm one of the management team so have some influence over the direction of the company, but no directorship or ownership stake yet.

I've been offered the opportunity to buy a 1% of the shares in the company. They would not be ordinary shares - they'd be a class of shares where the value would only be realised when the company is sold (which is the plan within the next 10 years).

Aside from whether the amount they want for 1% is reasonable (which I believe it is), I'm after some advice on this. I am already aware of some of the risks of this:

  • The company could go bust of course and I'd lose it all.
  • If I want to leave the company I may only get my original investment back - or possibly less if the company has devalued (which the owner could do deliberately if he wanted to!).
  • The owner may decide not to sell, leaving my investment stuck in there indefinitely.
  • The owner could decide to dilute the shares by issuing a large number of shares to himself, diluting my shareholding to <1%.

So what I'm after is some advice on the risks and what can generally be done to mitigate them if anything (especially the share dilution as this is most out of my control) - I assume via a shareholders' agreement or similar. Assume that I want to find a way to make it work rather than find reasons not to invest. I asked some of these questions a while ago to a solicitor who seemed to indicate that he'd review and firm up a shareholders' agreement for about £2-3,000 which is way over what makes sense in this context.

So, what do you advise?

(Posting anonymously for privacy reasons but I'll keep an eye on the thread)

  • Are you sure they are offering you shares in the company and not stock options? – ChrisInEdmonton Nov 16 '15 at 15:36
  • Yes, 1% of shares in the company in exchange for a sum of money I'll pay the MD. – Thinker Tinker Nov 16 '15 at 15:44
  • Are they limited liability? The UK is the jurisdiction where Lloyds of London "names" still have unlimited liability. If 2000 pounds is "too much" for true professional advice, then this means the amount you would invest would be an amount you could "afford to lose" even if you were not that happy about it? – user662852 Nov 16 '15 at 16:12
  • @user662852 - it's a Limited Company yes. You're right, that the amount is something I could "afford to lose" although it would not be nice to do so! So I'm looking to mitigate the risks but without spending a significant proportion of the proposed investment (remember, it's a small company) on legal fees (which I definitely won't ever see come back!). – Thinker Tinker Nov 16 '15 at 17:45
  • I'm confused about the actual meaning of the 'shares' you would own. Is this an (as mentioned in earlier comments) an option, allowing you to receive a number of shares at the time of sale of the business (but giving you no ownership prerogatives or dividends, if any, until that time), or (almost equivalently) a derivative contract, just giving you the cash value of 1% of shares when the shares are sold? ...con't... – user11599 Nov 17 '15 at 0:57
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I don't see any way to "mitigate the risk" other than being very involved in the company's operation, or selling off the share (which means losing the potential gains as well).... presuming that it's already incorporated so you bear no personal liability should it collapse or be sued. You'd be becoming part owner of the company, with all that implies.

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    So there's no way to mitigate against share dilution? Of the listed issues this seems like the one that would be most out of my control as a manager in the company - as the owner could just do this at their will. I guess the same could be true of devaluing the company deliberately to avoid me getting a payout on sale, but that would seem to be against his best interests... – Thinker Tinker Nov 16 '15 at 17:48
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    Not without owning a large enough share to vote that down, or some contractual paperwork in place preventing it. The latter needs a lawyer, which would be the next step if you're still interested in any case. – keshlam Nov 16 '15 at 19:12

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