Can I assign the equity rights without transferring ownership?
I am starting a new venture. An investor has agreed to invest into this new company provided that I transfer an equally valued Apple shares into the same company. I am told that this would not be encashed unless the business results into losses for the first 3 years. This is more of a guarantee to the financial investor. Can i transfer the equity rights i.e. dividend, voting and bonus without transferring the ownership of these shares?
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So, your investor wants to share in the upside, but doesn't want any downside, i.e. no risk. Sounds like a bad deal to me, unless I've misunderstood what you meant. This is a secured loan, not an investment in the traditional sense. – Steve Jones 11 years ago
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This all starts to sound like a complex derivative trade. If the Apple stock price goes up (likely), the "investor" will become more motivated to trigger the guarantee and get the shares. Even if your startup is a success, if you don't at least outperform Apple, you're doomed. Run away and find a real investor, not a loan shark. – Steve Jones 11 years ago
2 Answers
You could assign the "Economic Interests" in the Apple shares--e.g., you'd agree to pay over whatever dividends you receive.
The only way I think you could pull this off would be to sell your current shares to your corporation. You could do this by selling your apple shares pushing that cash into your corporation then buying some back , you might lose or gain a bit depending on the price difference. The shares would then be an asset within your corporation which means the ownership would be divided amongst your shareholders. If the company goes bad those shares could be sold to raise cash to pay of debt or fund some sort of initiative.
If your investor is looking to see these as some sort of security if the company goes bad he should know that in most countries there is a chain of payouts. Typically first off secured creditors must get paid, or employees pensions and salaries depending on country / local regulations, then debt holders , then vendors , and other non-secured creditors, then finally shareholders. This can get rearranged a bit through a reorganization plan but by default it's whats laid out by SEC. So this wouldn't be the security your potential investor is looking for. Sounds like what he really want is a bond which is 100% different or just a straight up secured loan.
I agree with Steve Jones in the comments, sounds like his attitude is that he wants all the up side and no downside. This is not the mind set you want in a startup investor. You want someone who believes in you and wants to help you succeed. If it was me I wouldn't take on an investor / partner trying to limit their downside and place it all on me.
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You could also write a personal guarantee promising your shares to your potential investor trigger by some sort of measurable event or set of data. Totalling the amount of apple stock he wants. – Ross Mann 11 years ago
