Tax Solution for Anti Dilution - Entrepreneur

Tax Solution for Anti Dilution - Entrepreneur

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Hi,

I have a client who is an entrepreneur in a business with financial investors. 

As part of issuing new shares after a fund raising round, the entrepreneur has an agreement that he will only be partly diluted by the issue of new shares. 

In order to accommodate for this, it is required to issue new shares (or options) for the entrepreneur. 

The main question - does issuing the new shares will result with the entrepreneur paying tax for them?

It's important to clarify that the value of the shares hold by the entrepreneur before the financing round and after the financing round (with the new shares) will stay the same. 

The other option is to issue options under EMI, however, then there will be no voting rights.

I hope it's clear, if not, please let me know what else I should provide.

Thank you for your help.

David

Replies (5)

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By WhichTyler
14th Dec 2014 12:40

Keeping his cake & eating it...

Not clear how he can sell a part of the business, yet have no loss of value? You may need to give us some numbers... 

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paddle steamer
By DJKL
14th Dec 2014 13:13

Does the OP mean the proportion rather than the value?

Do you mean he will own the same percentage?

Given the fundraising presumably involves the others injecting funds then, ceteris paribus, the value of the business will increase.

Or is there some different arrangement?

As WhichTyler says, some numbers would aid our comprehension.

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Replying to DJKL:
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By davidbant
14th Dec 2014 23:58

Adding numbers

 

Adding numbers: all shares are common ordinary shares.

The new round is a down round, no increase in value.

Number of shares that the entrepreneur is holding before the round - 100,000 ordinary shares, and the value of the shares is £100K. Total number of shares in the company is 500,000 shares. Price per share is £1.

The round will issue additional 200,000 shares for new and existing investors. Price per share goes down to £0.9 post money. 

So, now the entrepreneur has 100 shares which worth £90K.

The entrepreneur wants to go back to £100K for value of his shares, and investors agreed to issue him additional 11,111 shares. So now the entrepreneur will have 111,111 shares and the value of his holdings will be £100K.

To summarize:

Percentage went down from 20% (100K out of 500K) to about 15.8%

The value of the shares stayed at £100K

The entrepreneur received 11,111 new shares.

There was no sale of shares by anyone. The total new shares issued is 211,111 (200K to new investors and 11.1K to the entrepreneur)

 

The question - does the entrepreneur need to pay tax for this? no value was actually created for him. 

Thanks!

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Replying to adf2410:
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By WhichTyler
15th Dec 2014 00:45

Calculations...

davidbant wrote:

 

The new round is a down round, no increase in value.

Number of shares that the entrepreneur is holding before the round - 100,000 ordinary shares, and the value of the shares is £100K. Total number of shares in the company is 500,000 shares. Price per share is £1.

The round will issue additional 200,000 shares for new and existing investors. Price per share goes down to £0.9 post money. 

OT: So the new shares are valued at 65p at least? So your entrepreneur is receiving at least £7,222 of value (or £10k if your 'post money' valuation is right; but if the business is worth £500k, it's not clear why the new investors are buying in so cheaply) 

Arithmetically, they will have to issue a few more shares if they are trying to achieve this (I make it 13,208, rather than 11,111), or the other shareholders reduce their shareholding appropriately. 

Does he have to pay tax on this? I don't think so. It's a bonus issue, and he'll only pay tax on them when he sells them. They arise as he is a shareholder, not because he is an employee.

 

 

 

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By zebaa
14th Dec 2014 13:10

A, B, C shares

Would different classes of shares work? For example A shares have votes, B shares do not & so on.

 

 

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