Legal Question in Business Law in California

Re: Business ownership contract by issuing shares

You can only become a shareholder with consent of the owner. If he doesn't approve, you could pursue a claim for compensation for your efforts. If you get an agreement to make you a shareholder, you'd better prepare the necessary agreements and corporate records through competent counsel, to avoid rather serious problems and disputes later. Feel free to contact me if you need such legal help.

Re: Business ownership contract by issuing shares

I take it you don't have an agreement with the owner at present. This is bad news for you; if you wanted an ownership interest in exchange for your labor you should have worked something out with him beforehand. You cannot force him to make you an owner against his will now.

You are not necessarily entitled to any compensation for your work, but I will assume for present purposes that you are. What you would be entitled to is the fair value of your services -- in other words, you would be entitled to *money*.

You and the owner can agree to some other form of payment, but if he doesn't want to pay you some other way you will have to accept money. If he doesn't pay at all and you take him to court, all you can hope to win is a judgment for money and not an order that he give you shares in the company.

When a person does some work for another without specifying whether and how he is to be paid, he does not have license to just pick something the hiring party owns (in this case, stock) and demand it as his fee.

Suppose you ask someone to do a lot of work around your house, and that the work has a fair value of $10,000. If he demands payment he cannot demand a portion of your land worth $10,000, nor can he demand that you give him your $10,000 car. All he can require from you is a cash payment, and that is all you can require from your friend or his business.

Have you ever looked at a dollar bill and seen the text that says "this note is legal tender for all debts, public and private" and wondered what it means? It means that if one person is indebted to another he is legally entitled to satisfy that debt with cash (unless he has previously waived that right by agreeing to different terms). There is no way to demand some other valuable property of your own choosing.

Re: Business ownership contract by issuing shares

If the person in control of the corporation is willing to compensate you with stock, you should have a written contract, which can be quite simple, but the essential terms should include:

1. The parties to the contract. First, figure out if you are working for the corporation or for the owner - most likely, the corporation. Then figure out whose stock will be given you - newly-issued shares, or shares already issued.

2. It is far simpler if you work for the corporation and the corporation issues you new stock. If the owner is involved either as the person you work for or as the person whose stock is transferred to you, you need a three-party contract.

3. Always keep in mind that the owner is not the corporation, and the corporation is not the owner.

4. The contract should specify a rate of exchange, or a fair means for determing a rate, for example, five shares for every hour worked, or three shares a day, or 500 shares per dollar of expenses incurred - the proper rate can only be determined by the two of you taking a serious look at the value of a share of stock and the value of an hour of your time, but give it study and don't be too arbitrary or someone will end up unhappy.

5. The contract should specify times at which accumulated claims for stock will trigger issuance of a share certificate to you, e.g. you get a stock certificate for the agreed number of shares once a month; or, you get a certificate for 1,000 shares whenever your services entitle you to that much.

6. It would also be possible to structure a deal for a flat percentage of the company in exchange for a pre-defined amount of services; for example, "I'll do all the errands for six months in exchange for a 30% stock ownership."

7. The contract should have a provision for what happens if the two of you can't get along. e.g. maybe a buy-sell agreement.

8. Corporations with two shareholders must have at least two directors. The owner may prefer to put his brother-in-law on the board, but you should consider including a provision that you will be on the board, or in some way involved in management (possibly as treasurer, secretary, etc.). (Every corporation must have a chief executive or president, a secretary, and a chief financial officer or treasurer, but one person can hold one or more offices.)

9. You should have protection against dilution of your interest caused by issuance of huhe numbers of additional shares to the owner or his pals without your knowledge or approval.

Finally, you should obtain a copy of the bylaws and financial books and records of this corporation and read them to assure yourself that the deal you're making is consistent with the bylaws, that your deal is fair, and the overall setup and management of the corporation are "heads up" and not too rinkydink or informal.