legal, equityAs a web/app developer I was approached by someone starting a business and asked if I would develop their website and app at a reduced rate in exchange for 10% of the company.
I agreed, developed the website, currently developing the app and I have been paid the agreed amounts. I also “appear” to have my 10% share, however there doesn’t seem to be any mention of my name on companies house.
The owner is using something called rapid formations to manage my 10% share, it looks as if the business is split into 10 shares, of which I have one, and he has 9. Is this legally binding enough, and why does it not appear on companies house?
The agreement as it stands now is:
Neither myself or the owner have any experience dealing with the legal side of things like this and as a startup theres not alot of free cash to go to paying big solicitor bills.
Are there any good resources I can read so that I am up to scratch on this? Also are there any templated legal documents that I can adjust and have the owner sign to absolutely nail down the agree’d terms?
I do trust the owner, and so far all of our negotiations have been based on trust, but I would feel a lot better with everything in writing.
Any advice would be greatly appreciated
The owner is using something called rapid formations to manage my 10% share, it looks as if the business is split into 10 shares, of which I have one, and he has 9. Is this legally binding enough, and why does it not appear on companies house?
Except where they are a “person with significant control”, shareholder details need be provided to Companies House only on the confirmation statement (formerly the annual return)—and at that, only if the company’s shares “have not been admitted to trading on a relevant market” (which they clearly will not have been in this case). Because this information need only be filed annually, it’s only a snapshot of the shareholdings at that moment in time—and, for a recently incorporated company, it will not even be present at all (although the statement of capital on incorporation will show the shareholdings of the initial subscribers).
The authoritative record of a company’s shareholdings is its register of members (a document that its directors must maintain in accordance with the law). Unless the company has elected to keep this register at Companies House (most do not), it must be available for public inspection for a minimum of 2 hours every workday between 9am and 3pm at the company’s registered office (or the Single Alternative Inspection Location if one has been recorded at Companies House).
You would therefore do well to inspect this register in order to verify that the shareholdings are as you understand them to be. If the register is not kept at Companies House, you may need to give the company advance notice (typically 10 days) of your intention to inspect, providing in the notice the purpose of your inspection and the names and addresses of yourself and any other parties to whom you intend to disclose the information. The company can charge a fee of up to £3.50 per hour of inspection.
However, merely establishing that you today own 10% of the shares is not particularly great protection for you—especially if the other 90% are all owned by one other party, as that other party could force through all sorts of decisions of which you disapprove: including disapplying pre-emption rights (by first varying the company’s Articles if necessary) in order to allot new shares (e.g. to himself) that forcibly dilute your shareholding; or appointing/removing his choice of directors (presumably he is currently the sole director), who in turn make unfavourable decisions e.g. regarding their own remuneration—thus he could decide to pay himself sums, e.g. by way of salary, that reduce what is available to be paid to you.
Consequently, coming to an understanding over how you collectively intend to manage the relationship is strongly advisable—and such a shareholders’ agreement should be documented in writing in order that it is not only clear to all concerned, but any future dispute can be more easily resolved. Besides covering fundamentals such as restrictions on the issuance of new shares or directors’ remuneration, the agreement may also cover such things as “drag and tag” (by which he can force you to sell your shares if he finds a buyer for his, or you can force a buyer of his shares to also buy yours).
- When the owner takes any money out of the company for himself (dividends I guess?) then I will receive 20% of that money (This is because I have gone way above and beyond simply being the developer for the business, as well as building things out of the original scope)
I don’t entirely understand this, on two grounds:
20% of what money? 20% of what he gets, or 20% of the total amount paid out? That is, if the business pays out £90 in total, do you get £15 (20% of his £75) or £18 (20% of the £90)?
In either case, why does your shareholding differ to these shares of distributions? A dividend declared for a class of shares is paid out equally to each share in that class. Therefore, if a dividend of £9 per share is declared and you have just 1 of the 10 shares, you will only get £9 and he will get £81. It isn’t clear to me how you intend for the difference to be brought into account (nor indeed why you claim to own only 10% of the company when you are in fact entitled to a greater share of its distributions—which is all that ownership is, at the end of the day)? Better on so many fronts for the shareholdings to have parity with the intended distributions.
Are there any good resources I can read so that I am up to scratch on this? Also are there any templated legal documents that I can adjust and have the owner sign to absolutely nail down the agree’d terms?
For all the pain and trouble not getting this right could cause, I’d highly recommend getting a lawyer to draw up a shareholders’ agreement for you.
You definitely want to have your arrangement in writing. Not necessarily for a lack of trust, but to make sure that you both have the same understanding of what the arrangement is.
I’ll suggest three alternatives, each with increasing protection but also increased time/expense.
(1) Send an email to your partner explicitly listing the terms or your relationship and ask him to respond via email stating that he agrees.
(2) Write a up a contract yourself stating in detail the terms of your relationship, and you each sign this document. You can find plenty of contracts online as a model for this.
(3) Hire a lawyer.
I have no idea if (1) or (2) is sufficient to protect you, but it sounds like you don’t have anything at all in writing right now so either of these are better than nothing.
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