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    8 Replies Latest reply on Apr 10, 2010 7:19 AM by Mongoose

    Employee negotiates 5% ownership in company - Now What?

    UsedGoods Newbie

      When faced with losing me to another company, I was offered the 5% ownership. I am looking for meaningful solution to complete this written promise from two years ago. We are an eight million dollar-a-year manufacturing firm where I am second in command behind the sole-owner of an S-corporation. The owner is an old friend of mine and we continue to work well together, but the follow-through on our agreement is troubling.

       


      His lawyers state it will cost tens of thousands of dollars to properly do the legal work of stock transfers. Many people (we both talk to) say why do you want stock ownership - It is subjective and the tax ramifications can be terrible. We both want to come to a conclusion but we need direction.

       


      I wanted security, equity and financial benefits of the corporate growth (the company should/will be around 12 million a year in sales). At the time, it was clear that the 5% ownership would link us together for the future - this has never happened.

       


      Currently, the owner is worried about what other managers will think and he appears to have cold feet over his commitment of ownership. He is beginning to talk about annuities and to have something for all of the managers. I believe incentive programs are great, but I think the two of us committed to a course of partnership and now he is waffling. In our last conversation on the matter he state "do you want the ownership for your ego or do you want something that is quantifiable value"? OK he has a point, but we don't know how to get there.

      Your advice would be greatly appreciated.
        • Re: Employee negotiates 5% ownership in company - Now What?
          LUCKIEST Guide
          Ownership in company - Now What??

          Good question. Do you have YOUR lawyer?? You stated that "his lawyer"

          You also want VALUE or at least 5% of value

          Good luck, LUCKIEST
          <!--Session data-->
          1 of 1 people found this helpful
          • Re: Employee negotiates 5% ownership in company - Now What?
            Uncle Leon Tracker

            It's the old "Carrot on a stick" ploy. You should have been given 5% of the stock along with your agreement.

            Try one more time to talk to your employer. Tell him that if he doesn't do as he promised that you intend to hire a lawyer to assure that you get what you have been promised. When (not if) your employer attempts to put you off again, or to pacify you with something temporary, do not agree. Make it clear that you do not agree.

            Hire a Ruthless, money-grubbin lawyer NOW. The one with the most agressive reputation in the area...The one whose name all of his clients "mention" when being treated unfairly. I think a letter from him (shouldn't cost much) will cause your employer's lawyers to "find a way" to give you your due. It's cheaper than fighting.

            If not...fight. Sue for the stock promised, your lawyer's fees, and an additional amount (your lawyer will guide you) for the lost profits you've endured over the last two years.

            Why do you want to work for a conniving employer who cheats you. thak the stock, find another employer, and demand the annual profits as your share of the stock is entitled to.

            (I'll bet you get a cash settlement.)

            1 of 1 people found this helpful
            • Re: Employee negotiates 5% ownership in company - Now What?
              bpfinance Adventurer
              What you do will depend on what you want to happen. If you really want 5% ownership of the company, I would say that you need to force your employer to give it to you. I do not know the details of your relationship with the owner, so it is up to you whether you want to pursue this with "your friend." You need to weigh all of the possible non-financial problems that could arise, as we can only help you with the numbers. What you also need to understand is that just because you own 5% of the company doesn't necessarily mean you will be making 5% of $8M (assuming $8M is the net profit of the company). Your friend could decide not to give distributions to shareholders and just to re-invest that money into the business. If his lawyers are smart, they will set up the operating agreement so that he doesn't have to get your permission for any business decision that is made. For example, if a 75% majority is required to decide whether distributions/dividends are given, he could decide whether or not to give distributions whenever he wants.

              This creates a problem sometimes for minority shareholders because in an S-Corp, profits are passed through to individual shareholders for tax reporting purposes. So, lets say the company nets $10M in a year, your share of the profits would be $500K. However, if he decides not to distribute dividends, you will be paying taxes on $500K even though you never got that money. Therefore, you have to find some way to just come up with about $100K-$150K to pay the taxes you owe. I don't know him or your relationship with him, but I do know of people who would do something like this just as a type of revenge even where relationships before an incident were fine. So, there are potential tax consequences that you need to be aware of.

              There may also be legal consequences that may subject you, as a shareholder, to liability in case of a lawsuit. We cannot give legal advice, and you should consult a lawyer to determine what liability issues may arise.

              If you need any more assistance or have any more questions, let me know.
              forumresponse@brienprivatefinance.com

              Jeremy Barfield
              Chief Forum Response Correspondent
              http://www.BrienPrivateFinance.com
              • Re: Employee negotiates 5% ownership in company - Now What?
                Navigator
                I'm not a lawyer, but we recently gave one of our people a similar package and it didn't cost that level of fees with lawyers. If your buddy really wants to make you an owner, I'm sure he can find a way. If he's dragging his feet, well.. you are smart enough to know the situation.