How should I handle bringing my friend coming on board my business?
How to keep the relationship healthy – and retain control – when a friend comes to work for your start-up
I’ve been working on a business plan for a new venture for about nine months and asked a friend for advice on it. He’s now quite keen to come on board with the venture and I think his experience could be really useful. However, I don’t want him to be a co-founder. How can I spell this out to him and what steps can I take to make sure I keep control in the long-term?
Hilary Devey writes:
There are a number of areas to consider here. Poor decisions taken now could be extremely costly to unravel in the future. It’s therefore critical once you’ve decided on your path, you ensure any agreements are properly prepared by a solicitor who fully understands your intentions.
In my opinion it’s considerably easier for a start-up business to be successful if there’s one ‘controlling mind’ capable of driving vision in the early days. As a result, I would advise against your friend becoming a part-owner, at least in the short term. You state that your friend’s experience could be really useful, however have you analysed in detail whether this will be of ongoing benefit to the business or purely during the start-up phase? It may well be that the expertise you value only has a limited life cycle. If this could be the case you should seriously consider whether it’s possible to agree some form of consultancy arrangement covering the start-up period. I know from bitter experience how costly it can be to take on additional shareholders at start-up and then to have to go through a process of dismantling the arrangement in less than a year.
If you’re convinced your friend can add long-term value I would counsel against issuing shares to your friend in the initial period. My view would be to bring your friend into the business initially as an employee (possibly a director) but with a formal agreement that provides for the friend to participate in profits subject to reaching pre-agreed targets. This can be achieved in many ways however the simplest are probably share options or bonus arrangements.
If after considering the above you feel it’s appropriate that your friend should own part of the business from day one then there are a number of practical steps to consider:
- If you’re going to trade as a limited company then you should restrict your friend’s shareholding to less than 25%. Under the Companies Act a minority shareholder with 25% or more has substantially greater ability to block company decisions.
- You should also have a shareholder agreement which sets out the basis of decision-making within the business. These are generally designed to protect minority shareholders against decisions being taken without their approval. You’ll need to ensure the agreement is worded so you don’t find the minority shareholder has a disproportionate ability to hinder your development of the venture.
- Equally if you decide to operate as an unincorporated business it’s essential that a partnership agreement is drawn up stipulating the right level of control on both sides, and preventing your friend from being able to block your decision.
Hillary Devey is the founder of the £100m turnover haulage company Pall-Ex and a ‘Dragon’ in BBC 2′s Dragons’ Den.
For more information on Hilary, read our blog: 10 things you may not know about Hilary Devey