Dividing the risks between director and shareholder?

[peternamnguyen]

Hi,

I’m planning to open an LTD company. An old mentor of mine, who is very experienced, wants to have 100% shares of the company initially. It means he wants to make all the decisions in the first year. Then his share will go down 10% each year (transferring to me) until it reaches 50% in the 5th year. The reason for this dominance is that he is very experienced while I’m not and he wants to show me the way a company should work.

I will then receive a fixed salary monthly. My salary comes from my mentor’s account: he will pay for me by his own money.

My thinking: what if after some months my mentor sees no future in the company and decides to run away, how do I survive? Should I ask him to deposit a 6-month or 1-year amount of my salary into the company’s account, then I’ll withdrawn from it every month?

In that case, I’ll be on a very safe side: receiving monthly salary for sure although I may not find any contract. And my mentors runs the risk of losing all shares if I screw up.

In short, my mentor has money and skills but he’s very old. I have the ability to execute but no money. I also have a family to take care of.

My mentor is also very persistent in having a lot of power over the company.

What should be the optimum option to divide the risks in my case?

Thanks a lot !

[NotAllThere]

Sounds very risky to me.

If your mentor owns 100% of the shares, it means he owns the company. From what you've written, he'll be the director of the company. That means he'll have full control over the company's bank account, he'll be able to sack you when he wants to, he'll be able to declare dividends to himself from the money you've earned for the company, and you will be unable to do anything about it. Even after 5 years, he'll still own half the company and be entitled to half of any dividends.

Better would be to save enough money to live on for three months (at least), and then go contracting off your own bat. Running your own company for the purposes of contracting isn't difficult. Or you can just use a brolly.

[zonkkk]

Sounds like, you are not starting a company, but your 'mentor' is and you are merely an employee.
It's not your business. You say he will take all the decisions "in the first year"; I would say, "in the first 5 years" based on the share distribution.

Out of curiosity, what industry is this in? What are the sort of important decisions your mentor/boss could make?
Is he going to contribute with anything other than managing the money you make and giving you advice?
How much money is he initially investing? I assume you invest nothing based on the information in your post.

What is your salary going to be; is it based on forecasted turnover? What happens if he gets no contracts, is he still going to pay you a salary?

[mudskipper]

Hi,

I’m planning to open an LTD company. An old mentor of mine, who is very experienced, wants to have 100% shares of the company initially. It means he wants to make all the decisions in the first year. Then his share will go down 10% each year (transferring to me) until it reaches 50% in the 5th year. The reason for this dominance is that he is very experienced while I’m not and he wants to show me the way a company should work.

I will then receive a fixed salary monthly. My salary comes from my mentor’s account: he will pay for me by his own money.

My thinking: what if after some months my mentor sees no future in the company and decides to run away, how do I survive? Should I ask him to deposit a 6-month or 1-year amount of my salary into the company’s account, then I’ll withdrawn from it every month?

In that case, I’ll be on a very safe side: receiving monthly salary for sure although I may not find any contract. And my mentors runs the risk of losing all shares if I screw up.

In short, my mentor has money and skills but he’s very old. I have the ability to execute but no money. I also have a family to take care of.

My mentor is also very persistent in having a lot of power over the company.

What should be the optimum option to divide the risks in my case?

Thanks a lot !

Well that all sounds very odd.

The salary should not come from your mentor's account, it should come from the company's account. Your mentor may make a director's loan to the company to cover it.

It sounds like your mentor is setting up a company and employing you. If that's what you want (and you mention security), then why not stay in regular permanent employment?

If the problem is initial cashflow, then use an umbrella for a few months till you have built up some reserves?

The setup you describe is not at all usual, and I would be very wary of getting into some complex arrangement even if the intentions are good at the outset.

[northernladuk]

What type of company are you opening. Is it something you don't have skills in yet? I'm assuming you are not an IT contactor like us?

[ContractorScum]

This sounds like a terrible idea. I dont understand why he would demand 100% only to release ownership cos he wants to show you 'the way a company should work'. I assume you will be doing all the work and he will be running the company.

What happens if the relationship goes sour? or even worse for you if the company gets bought for £10m or whatever. Do you really think he will give you some money?

I would suggest a 40/60 to him, so he does have majority control but you have a stake and he can still 'show you the way a company should work' If he says no to this then run cos something doesn't smell right here.

[northernladuk]

I think we need more details as I have a feeling this is completely different to what we do so our experience is worthless. This sounds very much like a father son business with a gradual transfer over to the son as he learns the ropes.

So. Questions to the OP.

How old are you?
What is the business you will be carrying out? Retail, importing. I guess it's not IT contracting.
What experience do you have in this area of business? Running a LTD is easy, running a proper business isn't.

If the OP can give us some details about the situation beyond his question I am sure all will become clear.

[cojak]

And who will take care of the taxes and regulations? Your mentor?

It will be you who runs the risk of HMRC knocking on your door if the mentor 'runs away' as you put it.

[Lance]

It sounds on the face of it like an awful idea.
Plenty of opinions on why it's not good.

So here's the only reasons I could see it working and what is needed.

* The mentor is putting in significant cash to start the company
* It's NOT an IT contracting company where the OP is the only worker
* The OP has no money at all for investment
* The initial wage is at least as good as the OP could get as an employee
* the share switch over is in a legal contract (which will cost a few thousand pounds)
* the share switch over is set to dates/targets that both parties agree to
* the mentor cannot just dilute the shares (IE. there must be a limit on issuing new shares)
* the mentor cannot just sell the shares without
* there must be some provision for death of either party
* exit clauses for both parties must be agreed (it may well just not work out and nobody wants to be left in the sh1te)

[Maslins]

Sounds like, you are not starting a company, but your 'mentor' is and you are merely an employee.

^^this.