The promise of future equity
So, you’ve had an offer to work in a business in return for the promise of future equity, maybe with a small wage. Usually these sorts of offers will come with so many ifs, buts and maybes as to be meaningless. The standard rules apply – any equity agreement should be in writing and as clear and unambiguous and unconditional as possible. It should be based on precise, calculable KPIs rather than qualitative descriptors and general assurances. Even then, the reality is that offers of equity in the future are best avoided. They are difficult to enforce and the employer will usually have deeper pockets and be more skilled in the dark arts of delay and obfuscation than any employee. However, if accepted in principle, the shareholders agreement or company constitution should be read thoroughly and understood before there is an acceptance of shares.
We’re not talking here about the gift of small parcels of shares as a small bonus (which may not become a full shareholding until certain conditions are met). Rather, it is the promise that if an employee commits to the business and helps make it a success, they will be rewarded with equity in the future. Well meaning employers should remember that ALL employees are entitled to minimum wages and conditions and all arrangements should be documented thoroughly. Otherwise employers might face an inconvenient, time consuming and expensive claim against them.
Going into business with your spouse/partner/friend
So you’ve decided to go into business with your spouse/partner/friend. You’ve had good advice and set up a company as the business entity. There might even be a family trust involved. You’ve received good financial advice that you should become an employee of the company if you are working in the business. BUT, have you also had advice about the possible implications if the personal relationship sours? A common scenario involves spouses setting up a business together, becoming shareholders and directors of the company and both being treated as employees for financial purposes. Often, little attention is paid to the broader implications of establishing these legal relationships. It can be very difficult to unravel the business relationship when the personal relationship comes to an end and very hard to separate personal animosities from business issues.
There are practical issues about whether both owners will or can continue working in the business and how business decisions are to be made and the terms on which the business and employment relationships should end. Businesses can be paralysed and their value destroyed where owners have fallen out and the company constitution does not allow for majority decision making or provide a pathway forward. It is important to note these key points:
• employment obligations and duties are different to ownership obligations and duties;
• ownership obligations and duties can continue even when the employment ends;
• work of value should be performed for the wages earned;
• if there is a breakdown in a personal relationship, an employee owner may be entitled to take personal leave if they are unwell and do not have to resign;
• employee owners are also entitled to the same unfair dismissal and general protection rights protections as all other employees. It may not be the case that they simply agree to resign;
• employee owners are entitled to be paid in accordance with minimum statutory and industrial award requirements, time and wage records must be kept where applicable and correct entitlements must be paid on employment separation;
• employee owners are entitled to payment of compulsory superannuation contributions;
• an aggrieved employee owner may seek to use their employment position as leverage for a greater business payout, whether it is by bringing an unfair dismissal claim or claim for underpaid wages/entitlements and potentially a workers compensation claim;
• other employees should not be made to feel that they have to choose sides, otherwise they may decide to leave the business;
• all employee owners should have an employment agreement and a distinction should be drawn between ownership tasks and employment tasks.
The destruction of the business asset as well as the personal relationship may be the price to be paid if these issues are not considered at the outset. These are of course general comments only. Please contact us if you would like any further information or help.