If someone has 5% equity in a company, how will they ever actually get paid?
In: Economics
They get paid when the company gets bought out by an investor. If I own 5% of company and some investor comes and offers 100mil to buy out the company, then I would get a payout of 5mil.
For a public company, just sell the shares.
For a private company, things are more complex. 5% is one of those “neither here nor there” portions of a company. Not large enough a stake (without support from other owners) to force any sort of majority ownership to do anything. Presumably it isn’t so small a portion that walking away is an option either.
1) Persuade one of the existing owners of the company to buy out the portion.
2) Persuade the majority of the owners to allow the sale of the 5% stake to a third party.
3) Persuade the majority owners to convert the equity portion to some kind of debt – ie get paid over time from the profits of the company. All other owners get a proportionally increased ownership share and no one has to pay a lot of cash upfront.
4) Find a buyer for the entire company willing to offer a really good price for the whole company.
It is a precautionary tale – when purchasing or investing in a private company (especially minority stakes) it is wise to have an exit agreement.
Read through the articles of incorporation or any other documents that should have been provided to the owners. There might be clauses there about profit distribution, how to make proposals before the owners (board of directors?) With cooperation it should be possible but if the situation is more dire (company not doing well) or if the majority owners are intent on excluding any influence from minority owners, things can get very messy.
There are few ways:
– they get a % of profits paid out annually
– the company goes public and they have shares they can sell on the public market
– if private company, they may be able to sell to other owners/investors at either pre-determined price or at mutually agreed upon valuation at time of sale
Latest Answers