[Question] Members interest in a CC and selling back

[troy_7]

Hi all

New to forums and business in general. I have read fairly extensively on registering a CC but I can't find the info I'm looking for on member's interest.

Myself and 2 colleagues (all fairly inexperienced at this) have come to register a CC which will be divided as 50% for the founder and 25% each for both myself and the other member.

We've started drawing up the member's agreement and on shares we currently have that the shares will be allocated at a discounted price of 50% and paid for over a certain period which seems fine. It also has clauses on members leaving and rules that the shares must be sold back but again at a discounted rate of 50%. It occured to me that when the company grows then the value of the discount I recieve will be lower than the value of the discount received when the shares are bought back.

So really my question is what are "good" conditions for the return of shares when a member leaves? Surely for there to be any incentive in buying shares at a discounted rate then I need to own the full rights to the shares once they have been paid for?

I hope I've explained myself properly, it's all a bit confusing for a newbie! Any help or advice would be greatly appreciated.

[Dave A]

Hmm. I smell all sorts of potential problems with this arrangement. Let's start with "shares."

Shares apply to a company, not a close corporation. With a close corporation each co-owner has a member's interest expressed as a percentage of the total ownership (100%).

Next is the whole concept of value. How is the value of the CC being calculated? You want the formula used to calculate the value to be as clearly defined as possible and for the sake of fairness and consistency applied exactly the same for future evaluations. I'd be particularly wary of how what is deemed the current value has been calculated.

I'd look very closely at how voting power is going to be assigned, particularly given the interest percentages you've mentioned.

And finally, I am really troubled by this discount concept, particularly for future sale of member interest. What is the logic behind that?

[troy_7]

Thanks for your reply Dave. Knowing we're on the wrong track is a good start to getting on the right track.

We've obviously gotten ourselves confused between a company and a CC. We will definitely be registering as a CC so I would have a member's interest as opposed to shares.

Would it still be reasonable to have to pay for this over a certain period? My salary will be increased by the amount I would have to pay - the implications of which I still need to determine. I'm not entirely sure where my colleague has acquired these rules that he's put forward but the logic behind the discount was that we could acquire our interest in the company at a reduced cost. Having said that the verbal agreement on starting was that I would 'manage the company in return for 25% of profit'. Should I argue having to pay for my interest in the company?

At the moment the value is being calculated as an 18 month projection based on average profit from February to July.

As for voting rights I certainly do see the problem but again not entirely sure what would fix this and keep all parties happy.

Many thanks for the helpful insight

[Dave A]

Would it still be reasonable to have to pay for this over a certain period?

As long as that is the agreed deal - should be no problem there.

Having said that the verbal agreement on starting was that I would 'manage the company in return for 25% of profit'.

Well, you're certainly quite a long way from that now. But it might not be such a bad thing. For starters, profit shown within the CC can be manipulated down with things like member salaries. If it's risky, it would be safer just to agree a salary deal and leave ownership out of the mix.

As for voting rights I certainly do see the problem but again not entirely sure what would fix this and keep all parties happy.

Possibly first round of voting by members' interest. In the event of a deadlock, second round with one equal vote per member. Hopefully there is mostly consensus and not much goes to a vote. But when things do end up going to a vote, it's normally the very worst time to be clarifying voting powers.

First prize would be to set it up in a Pty Ltd with an initial share issue of 1000 and holdings of 251, 251 & 498, with all three shareholders as directors. But you're going the CC route, so not an option.

Of all things, I'd be most concerned about this 50% discount for buy back though. It's too much of an incentive to push someone off the bus.

That, and the current valuation.

[Martinco]

Hi Dave,

Please help me right here...............I do not understand that if 3 people register a CC, what are the individual members "buying" ? Who pays and who collects money ?
Surely there must be an existing CC with assets belonging to a member who then sells a portion of his interest to somebody else , and only then "buying" takes place.
Man, I must say this post is confusing me !

[Dave A]

Martin, nothing wrong with your thinking. In a start-up situation you wouldn't be buying an interest from someone else who already holds the member interests, but making a contribution to the start-up capital of the CC.

I think troy_7's deal was being made complicated by some sharp negotiating.

[daveob]

I would 'manage the company in return for 25% of profit'. Should I argue having to pay for my interest in the company?

The way that I read this is that Troy would manage the company and receive a "management bonus" of 25% of the profits.

This should have nothing to do with the ownership / membership of the cc.

The 25% bonus would be written off to "salaries & bonuses" and then the final profit re-calculated. Tax would be deducted and then the profits could ( after the divs. tax ) be split proportionately between the members of the cc as per their interest ratio.

"Paying for your interest in the company" would be a completely seperate matter altogether. You could ( if agreed buy the other members ) buy 10% of the company, and at the end of the fin. year, be entitled to 10% of the distributed profits ( if any ), and these profits would be after the cc has paid your 25% management bonus, and tax, etc.

That's the way I read it.

[Martinco]

Martin, nothing wrong with your thinking. In a start-up situation you wouldn't be buying an interest from someone else who already holds the member interests, but making a contribution to the start-up capital of the CC.

I think troy_7's deal was being made complicated by some sharp negotiating.

Something still does not sound right to me. Ok, they contribute 50% , 25% and 25% of startup cost and if you as a member are employed by the CC, then you are entitled to a "salary" whatever the amount is ( not determined by your interest % ) and should the CC have a surplus year end after all costs/taxes have been taken care of, then the profit can be divided according to the membership percentage provided 51% of the membership interest decide to do so. ( Here I see a snag )

By the sound of the original post Troy and company are trying to determine the what-if situation when a member wants to sell his interest and surely the value should be determined by the normal route as per a post that Vincent made in determining the value of a COY/CC. The buyback at 50% of the value ( who determines this ? ) does not make any sense to me.

My personal feeling is that it is getting complicated even before a single widget has been sold.

Just my penny's worth !

[Clint Davids]

Hi There Guys

Can i ask a really stupid question? If members of a cc share the monthly profit according to their percentage ratio, how do they buy stock to trade with the following month? Is this where the start-up capital comes into play?

Regards
Clint

[daveob]

If you want to survive and grow, you'll have to keep some of that 'profit' to buy new stock ( which means it's not profit at all - it's working cash flow ).

Once you have done that, and you make sure all your expenses are paid ( including the salaries for the workers, and that includes the salary for any working members ) and keep some aside for VAT, company tax, etc.

After all of that, then you may have some profit remaining for sharing.

[Dave A]

Just don't draw all the profit from the business each month. At least leave enough behind to finance the next month and some change too. Remember, the tax bill on those profits hasn't come in yet.