What to consider if you are thinking about making an Employee a Shareholder

On 1 August 2023 our Director, Amanda Crosbie and Principal Solicitor, Tony Peterson hosted a live LinkedIn Q&A answering What to consider if you are thinking about making an Employee a Shareholder.

Like our LinkedIn page to stay up to date and receive notifications about our live Q&A’s in future.

What are the first steps?

  • Consider what you personally want and what you want for the business, this will inform what offers you are willing to make and what control you want to maintain.
  • Decide what you are willing to offer:
    • Are you looking to grow the business? – Offer small Shareholders at a lower rate to retain staff.
    • Are you looking to succeed out of the business? – Offer shares as an investment.
  • Approach the employee to see if they’re interested.
  • Consider special conditions in order to achieve goals.
  • Engage with Accountant and Lawyer to prepare:
    • Valuations,
    • Share Sale Agreement,
    • Employment Contract, and
    • Shareholders Agreement.

Will I lose any control when I bring on a shareholder?

  • This depends on what you are looking to achieve out of the sale, and is dictated within the Shareholders Agreement.
  • If you are looking to succeed out of the business, you may opt to lose some control to allow someone else to step in.
  • If you looking to grow the business and retain key staff, you may opt to maintain majority control by:
    • Making the employee a Shareholder and not a Director.
    • Maintaining your position as the managing Director.
    • Addition terms within the Shareholders agreement regarding voting rights.

How do I exit an underperforming employee shareholder in the future?

  • This is dealt with by having an effective Shareholders Agreement.
  • Shareholders Agreement can detail:
    • Trigger events giving you options as the majority Shareholder.
    • Clearly detail how the buyback will occur.
    • Probationary periods.
    • KPIs.
    • Performance evaluations.
  • Without a Shareholders Agreement you cannot force a sale without going to Court.

What information should I provide to the new shareholder and when should I provide it?

  • Whatever information you are comfortable to provide and that you think is appropriate for the employee to decide whether they would like to invest.
  • The prospective Shareholder has a right to request any information they think is reasonable to make their assessment, though there is no legal obligation to give them any specific information.
  • Typical information provided:
    • Profit and loss statements.
    • Other financial statements.
    • Business forecasting plans.
  • As the information you provide is not typically available to an employee, it is advised you have a confidentiality agreement in place prior, if not already in your employment contracts.

Will I need to change my business structure, and will capital gains tax be payable if I do?

  • If you don’t have a company a change in structure will be required, this could be either:
    • Partnership, or
    • Company.
  • Restructuring is the sale of a business to a different entity and therefore does have tax implications that requires advice from an Accountant.
  • The most appropriate structure differs from case to case.

Business Lawyers for Sydney and Newcastle

Need Answers Fast? Contact Us Today

The information in this article is not legal advice and is intended to provide commentary and general information only. It should not be relied upon or used as a definitive or complete statement of the relevant law. You should obtain formal legal advice specific to your particular circumstance. Liability limited by a scheme approved under Professional Standards Legislation.

Solicitor Director
Accredited Specialist (Business Law)