Offering Stock in Your Business to Friends and Family May Cause Problems

Offering Stock in Your Business to Friends and Family May Cause Problems

When a business owner wants to get his or her family and friends involved, this should usually not include stock, interest or shares in the company. This could cause complications. However, there are some instances where this is heard of and standard such as friends and family shares.

These are given to those considered preferred individuals. These shares, stocks or interests may be allocated to persons before they are offered publicly. This means that the inherent value of these items may only be significant in the thought rather than how much they may be sold for through standard practices. 

Those that issue shares or stock in a company or that have interest in a bank may provide these to family and friends or to associates, extended family or acquaintances. This usually depends on the relationship and how well the issue knows the person. This generally gives a portion of control and stake in the company to the friend or family member, and the items are dispersed to the individual before the company goes public. While the stake in the organization is typically no more than five percent, it does frequently give a portion of control and deciding power to the person granted the stock, shares or interest.

Shares for Friends and Family

While there are stipulations provided for close associations and relationships to have a share, interest or stock in a company, it may be considered dangerous to do so when working for the organization. This may lead to a precedent within the business where more employees start the same actions. However, another complication may arise with a greater amount of power being shifted to the employees through influence with family and friends. This is because stock in a company usually provides a portion of power and control to the owner. This in turn gives him or her the right to assist in making decisions. The more stock he or she has, the greater percentage and the more decision-making power is given. When the worker is included in this and his or her influence is used to shift a topic to what he or she wants, this could be dangerous to other shareholders. 

There are several companies that have friend and family share plans in place so that a certain amount of stock may be allocated to these persons. With this known, the total amount of stock issued could be greater to account for these percentages. This would render any power the circle of friends and family has close to useless when accounting for the whole. For smaller business owners that have created a corporation, this means that any friends and family that have stock in the company could influence the decisions of daily or monthly transactions to the point that the owner is plagued with alterations he or she did not plan for initially.

Family and Friend Involvement in the Company

With a business that is not a larger corporation which may have hundreds of shareholders, it only takes a few with stock to influence any decision making that occurs. Shareholders and those with stock usually only come together during meetings that are often posted or arranged beforehand. When they are in conference, certain actions are voted on, and these may affect numerous aspects of business transactions. This means that a new product being introduced could be stalled when decisions are not amenable to certain factors of the item, pricing or if additional activity is necessary before the product may be accessible to the public.

Friends and family with this decision-making power may choose to talk about these issues outside of the company meetings, and this could cause complications with the owner or partners. If the stock provided to these persons causes a type of profit sharing, they could cause difficulties with someone in power which could lead to conflict with partners, owners or managers of daily transactions. If the individual becomes greedy and wants more, he or she may attempt to increase the amount of stock he or she possesses. Various other possible dangers may arise when the family or friend has ownership or interest invested in the company through stock provided to them.

Consulting a Lawyer Before Allocating Stock

Before any activity is completed that may alter how a company is run or is affected, a business lawyer should be consulted. He or she may explain how a different type of stock may be the better option to limit any interference.

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