October 26th, 2012 / Insight posted in

How to lessen start-up risks

ME writes: I am in the process of agreeing an equity stake (5%) and a salary to join a dotcom start-up. I would become a board member and a business partner. I would like to understand the best way to structure the deal so as to be legally binding and to my advantage from a tax perspective. I would also like to understand how one can eliminate the share-dilution problem that will arise over time. How can I best look after my interests?

All start-up businesses carry a high risk and therefore you need to make sure that you carefully evaluate the opportunity that you are facing. All start-up plans show a very good projection because nobody plans to set up a business that will fail. You need to make sure that you carry out due diligence on the plan to satisfy yourself that all the risks have been considered. In terms of the investment, it is possible that the company qualifies under the Enterprise Investment Scheme (EIS) rules. If so, you will able to gain income-tax relief of 20% on the amount of money that you invest for the shares. In addition, as long as you hold the shares for three years and the shares are purchased after April 6, 2000 any gains made will be free from capital-gains tax when you sell them. As you will be employed as a director any remuneration that you will receive must be at a reasonable rate for the services supplied, otherwise you will be refused relief under the EIS scheme. The company´s articles of association may include a clause giving pre-exemption rights to existing shareholders that stipulate that any issue of new shares by the company has to be offered first to existing shareholders. It is also common practice to have an agreement between the shareholders setting out their relationship and the company´s policy on dividends, the regularity of board meetings and the levels of capital spending. We recommend that you discuss your plans with your professional adviser.