SeedLegals has always made it possible to pay non-exec consultants and advisors with equity. Now we’re introducing several improvements that will make these payments more straightforward - and safer - for all parties involved.
The changes make it easier for the parties to agree on the right number of shares and the correct, fair and clear price for those shares, which the team member will pay by providing services.
The Problem
Previously, it was possible to issue shares to a consultant, Non-exec directors or an advisor in advance, typically with a reverse-vesting schedule that meant that some or all of the shares would be clawed back if the consultant or advisor stopped providing the service before they earned the shares in full. The price payable for those shares was often set to match the nominal value of the shares.
Some of our customers found it difficult to claw back leaving consultants’ shares if the consultants were not cooperating, and for many, the contractual price per share did not accurately reflect the value of the shares received (or the value of the service provided). This could cause all sorts of issues: imagine issuing shares to a consultant for nominal value after you just raised a round where investors paid ten times as much for the same class of shares!
The Solution
We have come up with a three-step plan that resolves all of these problems:- Change the way you think about the shares you offer a consultant
You are paying them with shares for their services. It makes sense that the value of the shares you issue is equal to the value of the services you receive (less any cash payments you are making): otherwise, you’d be giving away equity for free!
Example: Deborah is going to build you a website, and you’re in agreement that this kind of work costs £5,000. You’ve only got £2,000 in cash to pay her, meaning that you will need to issue Deborah £3,000 worth of shares to pay for the work delivered. - Choose the number of shares carefully
Sometimes a consultant insists that they want a certain number of shares in exchange for their services. This is risky because the value of the shares tends to change over time, and if your company does well you may end up giving away equity the value of which exceeds the value of the service you receive.
Example: Using the above example, if Deborah wanted 100 shares in addition to the £2,000 she’s getting in cash, then you need to make sure that the agreed value of the 100 shares is, in fact, £3,000 (in other words, that the price per share or PPS is £30). It is probably OK for the company if Deborah overpays (although too high a PPS could have an unexpected impact on your business, e.g. by inflating your next EMI valuation) - and this is not ideal for Deborah. If the PPS is too low, it is likely to anger your investors - not to mention the fact that the company will have left money (shares) on the table. - Only issue shares after the consultant has earned them
We get it, sometimes consultants ask for payment upfront - but what can make sense for cash payments (the consultant may actually need the cash injection to perform the service!) does not necessarily apply to shares: the Companies Act says that you can only issue shares that have been paid for - in our case, after the service has been provided. Plus, there is no need to include lengthy vesting provisions: each share will have been earned by the time it is issued.
Example: Deborah is going to deliver the website step-by-step over the next three months, spread over three monthly tranches of deliverables. When setting up her consultancy agreement on SeedLegals, you might select that you will issue shares to her monthly, over the course of three months, shortly after each tranche of deliverables is in.
In practice, when it is time to issue the next tranche of shares, you can use the Issue Shares product to do so.
Let us consider a couple of examples of how you would issue tranches of shares to Deborah on SeedLegals:
If you are going to give Deborah a floating number of shares that matches the value of her service:
- Before you commit to the agreement with Deborah, it is worth thinking about:
(a) the total anticipated value of Deborah’s work (£3,000 being the price she has quoted you for the website less the cash payment you’ll be making);
(b) how long she’s expected to take (3 months); and
(c) the valuation of your company and how it might change over the course of the next 3 months (let’s say it has been recently valued at £1,000,000 and your fully diluted number of shares stands at 10,000, and neither the valuation nor the cap table is unlikely to materially change any time soon).
How many shares do you need to earmark for Deborah? The answer is 3,000 / (1,000,000 / 10,000) = 30 shares.
It is good practice to make sure you have a valid shareholders’ permission (authority) to allot all of 30 shares before you contractually commit to issue the shares to Deborah. You can get permission by getting 75% of voting shareholders to pass a resolution for the allotment of these shares. Check out this article that gives you a template example of the resolution: Written Resolutions for the Allotment of New Shares: Template - The agreement with Deborah is signed, and one month later Deborah delivers the first set of results. You can open the Issue Shares page and generate documents for the issuance of the first (out of three) tranche of shares. The question is, how many shares?
A third of the £3,000 service has been provided, so you need to determine how many shares add up to £3,000/3 = £1,000. Let us say that, against your expectations, a recently commissioned valuation suggests that your company is now worth £1,100,000 with the same number of fully diluted shares (10,000). This means that your current PPS is 1,100,000 / 10,000 = £110. The number of shares you need to issue is 1,000 / 110 = 9.09. The consultancy agreement says that the numbers will be rounded down.
You can proceed to set up the Issue Shares event for 9 shares. To issue shares for services follow this guide:How to Issue Shares for Services: A step-by-step guide
You should skip the shareholders’ resolution because you should already have the authority for all of the 30 shares. Set the price per share at £110 and make sure to enable “Are these shares for services provided?” in the settings behind the board resolution.
Go through with the templates in the workflow, press Issue Share Certificates.
Repeat for every subsequent tranche.
If you are considering giving Deborah a fixed number of shares:
- Before you commit to the agreement with Deborah, it is worth thinking about:
(a) the total anticipated value of Deborah’s work (£3,000 being the price she has quoted you for the website less the cash payment you’ll be making);
(b) the number of shares she’s asking for (100).
The effective fixed price per share is £3,000 / 100 = £30. She will pay it (not in cash but by delivering your new website) regardless of any changes to your valuation, and whether it is a great opportunity or a terrible loss for either of you.
It is good practice to make sure you have a valid shareholders’ permission (authority) to allot all of 100 shares before you contractually commit to issue the shares to Deborah. Check out this article that gives you a template example of the resolution you will need in order to get their permission: Written Resolutions for the Allotment of New Shares: Template - The agreement with Deborah is signed, and one month later Deborah delivers the first set of results. You can open the Issue Shares page and generate documents for the issuance of the first (out of three) tranche of shares.
A third of the full service has been provided, so you need to issue a third of all shares - that’s 100 / 3 = 33.33. The consultancy agreement says that the numbers will be rounded down.
You can proceed to set up the Issue Shares event for 33 shares.
You should skip the shareholders’ resolution because you should already have the authority for all of the 30 shares. Set the price per share at £30 make sure to enable “Are these shares for services provided?” in the settings behind the board resolution.
Go through with the templates in the workflow, press Issue Share Certificates.
Repeat for every subsequent tranche.
A note about VAT:
If the consultant is VAT-registered (or will need to be VAT-registered), they will be providing a VAT-able service, and it does not matter that they’re getting paid for it with shares. This means that there will be VAT payable to the consultant, by the company, on top of the issuance of shares (the company should be able to claim the VAT back later). It is a good idea to ask the consultant for an invoice to make any future conversations with HMRC easier.
If you have any questions, please reach out to the SeedLegals team via the chat bubble!