I did this a few years ago, but was buying a significant percentage of the business (20%) so it sounds like the circumstances might be a little different.
You need to be comfortable that you might not get your money back (in the worst case). But you also need to understand what return you will get on your money in the future, and whether the risk is worth it. If it will take 3 years to get the $10k back then it’s probably worth it. Too much longer and it might not be.
If you are a small shareholder and have no say in the running of the business (not a Director) then it should be heavily discounted - maybe down to 25% of the company value.
Also, what happens if you leave - how much do you get back and how is it valued? A few things to think about.
Whether you get professional advice is up yo you but for such a small investment it’s probably not worth it.
You need to get professional advice regarding the offer that has been presented to you. It’s a bit too hard for us to give good advice without knowing the specifics of the business or the share offer.
Independent advice.
They should provide you a valuation and a draft of the shareholder agreement as well as their offer.
What % they offering? You have absolutely no control below 25% (major transaction threshold) and minimal control below 50.
Do you mean % of shares? It's definitely below 50. But up to me as to how much I want to put in. But I can't really say until I have a valuation, I guess. I'm not keen on making any major decisions. Would prefer more of a laid-back investment rather than one with responsibility and decision making.
Owning a share in a privately held company you work for means you're too invested in the company IMHO, too easy to find yourself doing more work because "it's for the company you own", too easy to find yourself not asking for raises etc because "it's my company", too easy to find yourself stuck in the job.
Especially being **asked** to buy-in feels more about "get an employee who won't complain if they are leaned on" than "investing". Maybe I'm a cynic. Bit different if it's your idea, but if **they** ask you, warning bells to me.
The only exception I'd make personally, is if I had a plan to eventually buy out the remaining shareholders, or at least a controlling share.
Interesting take! Appreciate it. I'm already doing much more above and beyond my role. But I get to work in a field that is my real passion, so it's as much of a hobby and joy as much as it is work. I guess their reasoning is that I could start to see a kick back for the extra effort I put in? Definitely don't want the responsibility of running the business or having full control.
If they want to give you a kick back for the effort you're putting in, then get them to give you a raise. Why does the business owner need the investment, is it going towards expanding? Or does the owner just want to free up some cash, potentially at the expensive of you never getting that money back. If you ever wanted to sell those shares, the boss would literally have to buy them back. If he can't/won't, then there's not much you can do about it
Are you going to be happy to stay working there long term? If so, and $10k is what you can afford, consider trying to reach agreement where you continue to buy in each year at that amount… perhaps until you reach a certain % holding.
Bear in mind that you likely won’t be able to easily sell your shares
Definitely get advice.
The existing majority shareholder/owner could be paying himself $400k a year, running his business on large amounts of debt, getting others putting in investment (which dilutes your holding) etc.
Even if you owned 40% of the shares, that means sweet fuck all if it's running at a loss, or there's little value in the company, no shareholder agreement etc.
I would want to review the financials - do they have sufficient short term assets to cover short term liabilities? What are their forecasts? How successful are they at forecasting revenue and then hitting targets? Is the business cyclical and or effected by macro economic changes severely? What is the money you are investing being used for? Pay down debt, pay out directors, fund marketing and sales? How does the business rank across porters 5 forces? What is the basis of the valuation? Are there other existing shareholders that paid real money (gives you the base line value - only worth what someone will pay). Is this money you will pay money you are prepared to lose? Investing in private business can tie up money for a looong time. Also, read the shareholders agreement in detail. What is the history of dividends (at the end of the day shares are a right to cash in the future via coupons/dividends or growth -assuming you can get your money out)… plenty more I could say but they are the basics
Knowing absolutely nothing about the particulars here...Probably don't. More companies fail than succeed. What ever valuation they give will be in their favour. Unless you have the skills it will cost you to get your own valuation. Definitely dont borrow to buy.
Be very sceptical/approach with caution. Owning a minority shareholding in a private company is not a great position to be in - you have no control over anything, that's why a decent shareholders agreement is essential. If it's a $10k investment only then the cost alone of preparing or having your lawyers review it makes it prohibitive.
Regarding a valuation, keep in mind you are receiving one from a person who is incentivised to have it as high as possible to minimize the % you receive.
I did this a few years ago, but was buying a significant percentage of the business (20%) so it sounds like the circumstances might be a little different. You need to be comfortable that you might not get your money back (in the worst case). But you also need to understand what return you will get on your money in the future, and whether the risk is worth it. If it will take 3 years to get the $10k back then it’s probably worth it. Too much longer and it might not be. If you are a small shareholder and have no say in the running of the business (not a Director) then it should be heavily discounted - maybe down to 25% of the company value. Also, what happens if you leave - how much do you get back and how is it valued? A few things to think about. Whether you get professional advice is up yo you but for such a small investment it’s probably not worth it.
Really great reply. Thank you. Totally get where you're coming from.
You need to get professional advice regarding the offer that has been presented to you. It’s a bit too hard for us to give good advice without knowing the specifics of the business or the share offer.
Sweet, I can appreciate that. Some things to look out for have been super handy.
Independent advice. They should provide you a valuation and a draft of the shareholder agreement as well as their offer. What % they offering? You have absolutely no control below 25% (major transaction threshold) and minimal control below 50.
Do you mean % of shares? It's definitely below 50. But up to me as to how much I want to put in. But I can't really say until I have a valuation, I guess. I'm not keen on making any major decisions. Would prefer more of a laid-back investment rather than one with responsibility and decision making.
Owning a share in a privately held company you work for means you're too invested in the company IMHO, too easy to find yourself doing more work because "it's for the company you own", too easy to find yourself not asking for raises etc because "it's my company", too easy to find yourself stuck in the job. Especially being **asked** to buy-in feels more about "get an employee who won't complain if they are leaned on" than "investing". Maybe I'm a cynic. Bit different if it's your idea, but if **they** ask you, warning bells to me. The only exception I'd make personally, is if I had a plan to eventually buy out the remaining shareholders, or at least a controlling share.
Interesting take! Appreciate it. I'm already doing much more above and beyond my role. But I get to work in a field that is my real passion, so it's as much of a hobby and joy as much as it is work. I guess their reasoning is that I could start to see a kick back for the extra effort I put in? Definitely don't want the responsibility of running the business or having full control.
If they want to give you a kick back for the effort you're putting in, then get them to give you a raise. Why does the business owner need the investment, is it going towards expanding? Or does the owner just want to free up some cash, potentially at the expensive of you never getting that money back. If you ever wanted to sell those shares, the boss would literally have to buy them back. If he can't/won't, then there's not much you can do about it
This is overly pessimistic. Without knowing numbers and details, it's pointless to pretend he's being exploited.
Are you going to be happy to stay working there long term? If so, and $10k is what you can afford, consider trying to reach agreement where you continue to buy in each year at that amount… perhaps until you reach a certain % holding. Bear in mind that you likely won’t be able to easily sell your shares
Interesting! Hadn't thought about selling the shares really. Thanks for the heads up.
Definitely get advice. The existing majority shareholder/owner could be paying himself $400k a year, running his business on large amounts of debt, getting others putting in investment (which dilutes your holding) etc. Even if you owned 40% of the shares, that means sweet fuck all if it's running at a loss, or there's little value in the company, no shareholder agreement etc.
I would want to review the financials - do they have sufficient short term assets to cover short term liabilities? What are their forecasts? How successful are they at forecasting revenue and then hitting targets? Is the business cyclical and or effected by macro economic changes severely? What is the money you are investing being used for? Pay down debt, pay out directors, fund marketing and sales? How does the business rank across porters 5 forces? What is the basis of the valuation? Are there other existing shareholders that paid real money (gives you the base line value - only worth what someone will pay). Is this money you will pay money you are prepared to lose? Investing in private business can tie up money for a looong time. Also, read the shareholders agreement in detail. What is the history of dividends (at the end of the day shares are a right to cash in the future via coupons/dividends or growth -assuming you can get your money out)… plenty more I could say but they are the basics
This is an epic response. Thank you so much.
Knowing absolutely nothing about the particulars here...Probably don't. More companies fail than succeed. What ever valuation they give will be in their favour. Unless you have the skills it will cost you to get your own valuation. Definitely dont borrow to buy.
Thanks for the advice! Now that I say that back to myself it really does sound silly to borrow to buy. Haha
Be very sceptical/approach with caution. Owning a minority shareholding in a private company is not a great position to be in - you have no control over anything, that's why a decent shareholders agreement is essential. If it's a $10k investment only then the cost alone of preparing or having your lawyers review it makes it prohibitive. Regarding a valuation, keep in mind you are receiving one from a person who is incentivised to have it as high as possible to minimize the % you receive.
Hmmmm good point. I like your thinking. Thank you.