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Working for equity

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    Working for equity

    I've got an opportunity to invest several months of my life in an established company in return for a share of it. The company is profitable but has a large amount of technical debt which is holding it back and is likely to cause things to peter out over the forthcoming years unless addressed, which it would be my role to do. I would take a directorship, and on delivery of the development I would receive shares giving me a significant (but not controlling) stake in the company. In its revitalised state it should thereafter be worth my while continuing to devote significant time to growing the company in return for the dividends alone.

    Does anyone have any idea how on earth all this works for income tax purposes? I assume tax would be due for the shares received? How would these be valued? I could make a (handwavy) case for them not being worth very much when I started the work, because of the technical debt, but the company would be worth more at the end, one would hope.

    #2
    Who's going to hold the shares. You or the company?

    Tax situation is pretty straight forward. Tax on nothing when it goes belly up is zero pounds. Easy.
    'CUK forum personality of 2011 - Winner - Yes really!!!!

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      #3
      Sounds like they are getting desperate and need people to work for nothing


      Sent from my iPhone using Contractor UK Forum

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        #4
        Originally posted by northernladuk View Post
        Who's going to hold the shares. You or the company?
        I will hold shares personally. This would all be completely separate from the ltd through which I normally freelance.

        Originally posted by northernladuk View Post
        Tax situation is pretty straight forward. Tax on nothing when it goes belly up is zero pounds. Easy.
        Thanks for your vote of confidence. Not to be out-gloomed, couldn't I incur a tax liability on receipt of shares then have it all go to zero afterwards and still owe the tax?

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          #5
          what does your accountant say??

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            #6
            Originally posted by BR14 View Post
            what does your accountant say??
            I do my own accounts as they've always been straightforward until now.

            Would a typical high street or contractors' accountant be likely to be up on such matters, or should I be looking for a specialist of some sort?

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              #7
              Generally shares given by an employer are taxable. There are various schemes that allow some tax relief. Perhaps of most interest in this case would be Enterprise Management Initiative (EMI). Google it and see if it would apply.

              You have to value the company. I'm assuming it is not publicly traded, so you're going to have to come up with some way to put a value on the shares. If you are really going to do this yourself, Google Company Valuation Methods, look around, choose one commonly suggested (and thus easily defensible) that gives a low price. Alternatively, pay someone to value it, there are people who do this for probably not a lot of money for a small company. They are banging on my door so they want business, so you can probably get a good price for the service.

              Do your research first so you know what you are talking about and if an accountant knows what he's about, but then talk to an accountant. You don't want to blow this one, this can be a very expensive mistake if you don't do it right from the first. He may recommend using a company valuator.

              Sounds like a multiple of revenue or earnings would give a more expensive price than net asset value, if the debt is that significant. So maybe tip the valuation scale towards NAV -- if it is going to be taxable now or later, you want the value of the shares to be as low as you can defend.

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                #8
                Originally posted by WordIsBond View Post
                Generally shares given by an employer are taxable. There are various schemes that allow some tax relief. Perhaps of most interest in this case would be Enterprise Management Initiative (EMI). Google it and see if it would apply.

                You have to value the company. I'm assuming it is not publicly traded, so you're going to have to come up with some way to put a value on the shares. If you are really going to do this yourself, Google Company Valuation Methods, look around, choose one commonly suggested (and thus easily defensible) that gives a low price. Alternatively, pay someone to value it, there are people who do this for probably not a lot of money for a small company. They are banging on my door so they want business, so you can probably get a good price for the service.

                Do your research first so you know what you are talking about and if an accountant knows what he's about, but then talk to an accountant. You don't want to blow this one, this can be a very expensive mistake if you don't do it right from the first. He may recommend using a company valuator.

                Sounds like a multiple of revenue or earnings would give a more expensive price than net asset value, if the debt is that significant. So maybe tip the valuation scale towards NAV -- if it is going to be taxable now or later, you want the value of the shares to be as low as you can defend.
                Isn't this correct if he is buying the shares?? I thought he is being gifted the shares?? If so wouldn't be any cost involved unless he gets divide nd or sells? If it gent in a better state holding the shares is more profitable and only tax is incurred when a pay out is made to shareholders or you sell the back.

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                  #9
                  Originally posted by cosmic View Post
                  Isn't this correct if he is buying the shares?? I thought he is being gifted the shares?? If so wouldn't be any cost involved unless he gets divide nd or sells? If it gent in a better state holding the shares is more profitable and only tax is incurred when a pay out is made to shareholders or you sell the back.
                  Generally, unless you are using one of the schemes that grants tax relief, the value of shares gifted to an employee (or in this case a director) is typically taxed as employment income. In that case, you want to use the lowest value that can reasonably be defended for the shares.

                  Otherwise, companies like BP could cut the salary of all employees by £10K a year, give them that much in shares every year, and dodge National Insurance.

                  Even within the different employee share schemes, there are thresholds, so it is generally going to be most advantageous to have the lowest reasonable valuation for the company that you can.

                  Edit: I am not an accountant. I just happen to have learned some things about employee shares over time. Some of what I used to know may be dated. OP should do his own research first, so that when he gets professional advice he can tell whether the advisor knows his stuff and know which questions to ask.
                  Last edited by WordIsBond; 6 September 2019, 07:40.

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                    #10
                    Could there also be VAT considerations if the value of the work would take him into the lower VAT threshold as a self-employed individual?

                    VAT: part-exchanges, barters and set-offs - GOV.UK

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