Should I resign current position before seeing and agreeing to contract with shares for new position?

Question

Long story short, based in the U.K I worked for a small company. The company got bought out but a much larger company which I have been with for nearly 2 years now.

My previous boss has left and asked me to join in his new venture. He has offered me a pay rise and shares in the company.

The problem I got is he wants me to resign before seeing the contract, also he said that the accountant won’t give me shares until I’m an employee.

Ideally what I want is a shareholder contract stating how much of the shares along with the salary before I resign.

Is that too much to ask?

Any advice would be much appreciated.

Answer 1

Is that too much to ask?

Not at all, rather they should be providing you with the written offer, before you ask.

DO NOT, I repeat, do not resign until you have a signed and sealed contract / offer in your hands.

There can be many reasons why your former boss cannot show you the contract before you resign - and none of the reasons are reasonable. This is same as asking to pay the price of something upfront when you don't know what you're actually buying / want to buy.

Never ever fall prey to such offers - they are more likely to do harm than good. Before starting the job, if they cannot trust you with an offer letter, how are they going to trust you when you become an employee?

TL;DR Only resign when you have done all of the below:

• Received a copy of the offer letter/ contract
• Read, understood and got clarifications and agree with all the terms and conditions.
• Have it signed and confirmed.

Answer 2

he wants me to resign before seeing the contract

That is a major red flag. It is absolutely professional to see contract before signing it, and I am not sure why your current employment would be a problem. If contract has NDA, this is independent issue.

In general advice goes as following:

You don't have a job until contract is signed. If you resign your current position, you will become unemployed. It is much easier to negotiate with unemployed people, rather than folks who have security of a stable job.

If you want to get more details, ask your prospective employer (former boss) about details of the contract and why you can't see the contract. You need to check it with your lawyer. Check your current contract notice period and non-compete clauses as well.

Answer 3

When it comes to the shares be very wary of attaching much value to them (and much less to a mere promise of them). Here are some things to be aware of:

• You can't know anything about their value without knowing how many shares there are in total (and potentially who owns them), what rights attach to those shares and what limitations are put on you. For example, do you need board approval to sell them? Must you sell them if you leave as an employee and at what price?
• Those who control the company can issue new shares and dilute the ones you have. In practice, they can choose whom to sell them to, how much they will pay and how many they will issue. They can make your shares worthless by issuing a huge number to themselves, for example. There are laws on this (eg, directors must consider the interests of shareholders as a whole and not unfairly prejudice minority shareholders) and it may be illegal to do that but you would need to enforce them yourself via the courts. It is almost certain that you would not be able to do this, or that you wouldn't end up better off at the end of it even if you did.
• Those who control the company can also extract profits by over-paying for things from another company they own, sell the business from one company to another for less than it's worth, transfer customers over to a new business, .... Essentially, they can screw you over without even relying on the previous point. Again, it may be illegal, but enforcement is not so easy.
• A 'real' investor or partner in the business - one with any sense, anyway - would negotiate a shareholders' agreement. This would limit the company and other shareholders to prevent the above things happening, might provide access to information or seats on the board, might oblige minority shareholders to sell if the company is acquired, etc.
• A real investor or partner would also do due diligence - if the business rests on intellectual property written by the founder, for example, then they would check that he really owns it and that he really has transferred it to the company. They would also check up on its legal liabilities, its debts, the people involved and so on. You are unlikely to be able to do any of this because it's unlikely they'll cooperate so you'll be vulnerable to all kinds of things.

Without some amount of power (and relationships and knowledge) to negotiate good terms, to 'defend' your shareholding and to understand what's happening in the business the value of your shares would rest entirely on the majority shareholders being honest, generous, honourable, insufficiently coordinated or simply not finding it worth their time to mess with you.

As an aside

the accountant won’t give me shares until I’m an employee

is likely to be nonsense, beyond it being because that's what he's told his accountant to do (although potentially there's something involving employee share schemes they want to use). At a minimum nothing stops the company contracting now to give you shares later. As an aside, your shares are going to cost money, albeit maybe a token amount, and you must pay the amount called on them otherwise you could later lose them.

Finally, be aware that things like non-compete agreements applied to shareholders might be much more widely enforceable than ones applied to employees.

Answer 4

The problem I got is he wants me to resign before seeing the contract,

No, first comes the term sheet.

EDIT: Then, the ShareHolding Agreement. I'll admit, I didn't realize this one was so important until I read Alex Hayward's excellent answer.

Then comes the contract, along with a vesting schedule.

And then, and only then, comes the resignation.

And I'm sorry, but if the guy doesn't know what a term sheet is, or how contracts actually work, he shouldn't be CEO, and he should just bow out and let someone else take over.

also he said that the accountant won’t give me shares until I’m an employee.

Of course, almost no one gets their shares on the signing of the contract (unless they have a ton of leverage for some reason), they’re usually dispersed over some period of time to incentivize you to stay with the company.

And that's why you need to see the final contract and the rest of the other documents before you can make an actual decision.

Either he doesn't know what he's doing, or he's negotiating in bad faith.

In case it's bad faith, I would just reject his offer via email. Having a written time-stamped record of the rejection could potentially help you should he ever try to get you fired by implying that you were interested in leaving your current employer.

And in case he's really negotiating in bad faith, after sending my rejection of his offer, I wouldn't even speak to him anymore. I personally believe it's a waste of time to start a new company with someone you don't trust.

Answer 5

The problem I got is he wants me to resign before seeing the contract

That seems backwards. I may be basing this on some experience I had, when I was the number two guy in a company (with no shares, though the owner had proposed something like that a bit earlier). The owner of the company ended up selling his company to another company which was probably our lead competitor in the area.

Before the sale was completed, he opened up his books to his competitor. The competitor was able to review how much money we made, who our customers are, who our employees are, and the work orders (which included details about each transaction - very many of them included complete text of E-Mails which, for many of them, were the entire conversation going on between our company and the customer).

Before the merger, the owners of these "competing" companies got along well (went to the same church, referred business to each other). Still, the potential damage that a competitor could have done with such information, if the merger failed to occur, seems enormous.

So, yes, definitely know what you're getting into before doing something self-destructive like leaving your current company (even if you knew your supervisor well and trust him to not screw you over using some of the methods described in Alex Hayward's answer.)