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If you’re a senior recruiter with an entrepreneurial streak, you may be offered the chance to own a minority shareholding in the creation of a new recruitment business, brand or entity linked to your current employer.

It can be an exciting opportunity… but it’s also a big decision that can have a huge impact on the next chapter of your career.

Here are our thoughts on when it is and isn’t the right move to accept a minority stake in a new venture.

Understanding equity

Being offered the chance to own equity in a new company can be both flattering and exciting.
It’s a step up from ‘employee’ status, and shows that your boss thinks that your contributions to future growth are important enough to tie in with the overall success and value of a newly-created business.
Perhaps even more importantly, it’s also a potential opportunity to make significant additional income, either through a share in business profits or from the proceeds of any sale, if the new company is acquired in future.
But it’s important to understand that owning equity isn’t valuable in itself.
It only becomes valuable if the underlying company creates value for the shareholder.
For recruiters who have never owned any shares in a company before, it can feel like a sudden rush of newly-discovered wealth to think “I own 20% of a business”.
But in reality, that has little to no worth until that business starts to generate sales, profits and create value.
As such, being ‘given’ 20% of a business doesn’t immediately make anybody wealthy – the same recruiter could register a company with Companies House in less than an hour, and own 100% of the shares.
The real value in the shareholding is what that company goes on to achieve – the hard work ahead!

Who’s creating the value?

Since a shareholding in a newly-created business entity has very little value at the outset, the most important question in gauging “who should own what” is understanding who is going to create the value in the company as it begins to trade and scale.
This is where a lot of minority shareholdings can start to look a lot less attractive!
If, as a co-founder in the business, you own 20% of the shareholding, that means that somebody else owns 80%.
That other person (or entity) is therefore in line to reap 80% of the rewards.
  • If the company pays £100,000 of profits to shareholders, the other person receives £80,000 and you receive £20,000.
  • If the company is sold for £1m, the other person receives £800,000 and you receive £200,000.

All this is fine, as long as you feel confident that the other person is creating 4x more value than you are – and is entitled to 4x as much reward…

To figure this out, you’ll need to ask some key questions:
Who is driving revenue?
The bulk of value in any recruitment business will come from financial performance – built on the ABC’s of winning customers, filling jobs, and ultimately hiring and training consistently-billing recruiters.
This is the core of what makes the company valuable to future acquirors, and the engine that will generate profits to be paid out to shareholders.
If someone else is owning 80% of the venture – are they making a very significant and direct contribution to driving revenue?
Or is the majority of the heavy lifting left with you, the 20% owner?
What resources are being provided?
Part of the appeal of many minority-share ventures is that an existing company is providing ‘established resources’ to support the new business.
This could be CRM and technology, back office support etc.
It’s helpful support, of course – but is it so valuable that it’s worth 80% of the value of the company?
If you launched a new company launched from scratch – purchasing a CRM and engaging an accounting partner – would you expect to give away 80% of the business for those services, forever?
How much capital investment is being made, and at what valuation?
Another reason a minority shareholding may feel like a good deal is because your boss is paying you a salary while you build the new business.
Again, it’s helpful to evaluate this objectively.
Suppose you’re being paid a £50,000 salary and your boss owns 80% of the new company.
That effectively values the new business – the initial estimated worth of your experience, track record and what you will go on to create – at £62,500
If you went to an external investor and presented your plan for the new business with a request for a £50,000 investment, you could see a very different valuation.
RecruitHub has supported many founders own 85-95%+ of their companies, despite having launch salaries paid by investors.
As the company becomes commercially successful, the difference in reward for founders based on the exact same results is vast.
Who has control?
Minority shareholders usually have significantly less control over the company than majority shareholders, in terms of determining how the business should be run.
They may have limited authority in strategic and financial decision-making, and potentially have little to no say in critical matters such as when to sell the company, and for how much.
If you are preparing to dedicate 5 – 10 years of your career to a new venture with the aim of capitalising financially on the success you create, having extremely limited control over how this happens in practice is potentially a serious red flag.
It’s also important to understand any shareholders agreement you are asked to sign as well, which could further limit your activity and restrict your ability to earn and create value elsewhere by blocking you from competing with the business or being active in other ventures – none of which are limitations the majority shareholder is likely to face.

When does it make sense?

There can, of course, be real value in a minority shareholding in any company.
But, before accepting one, it’s important to make sure:
  • You’re comfortable that someone else will own the majority of the financial rewards
  • You feel that the other shareholder’s contribution to the company’s success will be significantly greater than yours
  • You feel that the initial valuation of any investment is fair and competitive
  • You are comfortable not having control of what you’re investing the next years of your working life towards
  • You don’t have confidence you could achieve success independently
These few considerations – along with hundreds more – are all part of the rigorous scrutiny that goes into exploring potential acquisitions, and to build a company which withstands these inspections and emerges in the buyer’s eyes as truly worth a mutli-million-pound price tag is no simple feat!
How does it work?