Corporate mistakes your business may have made

...and what you should do about them.

Corporate requirements can be fiddly and, sometimes, unintuitive. It is easy for businesses to trip up on corporate issues. In this series we look at 10 of the most common corporate mistakes companies make, and, more importantly, what they should do about them.

When does it happen?

Founders (or even investors) wish to incentivise management, but simply give too many shares away. This can create real problems with founders or investors losing control of a business and being unable to afford to get those shares back when employees leave.  

What mistakes are made? 

There are many great ways to incentivise management using shares and options. However, if you don’t have the right protections in place, with a cap table (backed up with well-thought-through articles of association and a shareholders’ agreement) that works for the business, you can end up in a real pickle.  

Why does it matter? 

You may lose control of the business! The level of control you lose will depend on how much equity you give away. You may also end up with ex-employees holdings shares you would like to use to incentivise new hires, and potentially “unfair” distributions of proceeds on an eventual exit or for dividends.

What can you do about it? 

The earlier you act, the more you will be able to do. It is always best to plan how much equity you want to give away and to who. Possibilities include:

  • Using tax-efficient EMI options (where available) instead of actually issuing shares upfront. These can be only exercisable on an exit or if performance criteria are met (so that the employees have a “stake” in the business but no actual control).
  • Consider issuing shares which don’t have voting rights.
  • Updating your articles / shareholders’ agreement (where possible):
    • to entrench your overall control of your business
    • to ensure that you can easily purchase ex-employees shares if they leave the business (and think carefully about what an appropriate price ought to be)

Interested in reading what other mistakes you business may have made? You can read the full article with #1 – 10 here.