Article 2/6 from Rod Drury’s in the Herald
Rod speaks about key shareholding decisions that need to be addressed early on in a business’s formation in order to avoid troubles later on. Specifically working out how to value the business and the contributions by its founding shareholders should the exit of a founding shareholder occurs. It is one of these aspects that is not addressed until it is to late. Its great to read this as I have not come across anyone who has emphasised it as one of mose important point in starting a business – especially considering Rod is limited to 6 articles.
The article has sparked me to start noting down how much of my time (sweat equity)/money I am putting into my business and how much I believe this is worth. It is better to have and not use than the opposite. It has also made me aware of the need to draw up agreements with regard to how the business is divided up and exit strategies/ allowances for shareholders (when these shareholders are introduced). From an unexperienced view it may seem extreme and one of the last things on your mind , but in reality it is simply protecting your investment in the business, not to mention being professional.
Some of the comments that are made in response to Rod’s article pasted on his blog are acutally quite insightful as well. Some points include:
– setting up a 100,000 share company rather than a 100 share company allows greater flexibility later on.
– model for exiting shareholder (5%) within a 36 month period – lose the interest gained on there share, drip feed there investment back over 24 months. This business after receiving a surplus in 18 months gave 50% of it as a return to investors and invested the other 50% back into the business in the form of term deposits.
– start shareholders off with a small share of the company and reevaluate after targets are met
-even before the busienss is worth anything draw up a shareholders agreement.
– limit the number of exiting minor shareholders at any one time
Looking forward to the next article