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Founder shares:
Keeping your business
part of the family

Founder shares: Keeping your business part of the family

Published: 5th August 2019
Area: Corporate & Commercial
Author: Duncan James

No matter the business, succession will eventually need to be considered, and for some, keeping succession a family affair is important. The reasons for choosing to keep the business in the family can vary.

For example, it could be for tradition’s sake or it could be due to a lack of understanding of the alternative options available. However, not every family successor will want to take on the responsibility and may take over the business, only to sell on immediately without the consent of the previous owners. Founder shares offer a possible solution to this problem.

Duncan James, our head of family business, has created a guide to explain the protection that founder shares provide and how to ensure a smooth succession process.

What are founder shares?

Founder shares can be issued to the current owner or incorporated into a trust. They are a group of shares that give a minority group of family members the ability to control the future of a business. As well as preventing the sale of a business without the previous generation’s consent, they also require the successors to buy out the previous owners over time.

Considering introducing founder shares should be done as early into the succession process as possible.

Ensuring a seamless succession:

1. Think ahead – Succession is not an overnight process. Aim to look five or six years ahead when beginning the process, as this makes it far more tax efficient. If this isn’t done, successors can face heavy tax liabilities.

2. Assess what control you want to retain – Choosing which family member is to become successor is a decision that needs careful thought. Once selected, owners can identify the necessary protections and decide how other stakeholders will benefit. If external shareholders are to be involved, looking into specific share classes, such as growth shares, that can act as an incentive for them to grow the business with the successor is a wise move. Founder shares also help to maintain a level of control through stopping family members being removed from the board or the business by new shareholders, unless the specific class of shares agree.

3. Communicate – The succession process should not come as a surprise to those who are to be involved. As soon as the thought of succession arises, discussions need to be had with the family to ensure the wishes of the owner manager are known. Failure to do this can lead to animosity and significant tax issues for the successor.

4. Seek legal advice – Specifically seek advice from a professional experienced in family business law and succession issues. Succession is a sensitive topic that requires an understanding as well as knowledgeable approach. Professionals can advise on protections such as founder shares and help to keep tensions low.

If preventions, such as founder shares, are not implemented, successors are within their rights to immediately sell on a family business. In order to ensure a business keeps its family roots, discussing any doubts the potential successor has and considering founder shares at an early stage is vital.

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