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    TracyAZ
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    Hi there
    I am about to become a director of a start up company. We have three directors and two shareholders. The 2 shareholders have contributed capital in the form of a loan and us three directors are bringing our IP and skills to the table for our shareholding (but not contributing any money). We are trying to finalise our shareholders agreement contract. The investors want to establish an agreed value for the company in the contract. While my accountant says the company is only worth the value of its shares ($100), the investors are proposing a much higher value that validates their loan in relation to their shareholder percentage. So for example if their loan is $100,000 for a 25% stake, they are saying the company is worth $400,000. I am nervous about this. I am not sure what tax implications this holds for me. As far as I know, I will only incur capital gains tax if I sell my shares or start receiving dividends. (And I wouldn’t sell them unless the business was doing really well at some time in the future and by that stage valued higher anyway most likely). But are there any other implications? Tax or otherwise? I think they are proposing the high value as a way to recoup a capital loss if the business fails. Furthermore how do I report the value of shares to ASIC, are they unpaid shares? And can the investors even claim a capital loss if they didn’t actually buy the shares?
    Thanks I know it’s probably a complicated question. Any advice appreciated. T

    #1162509
    TracyAZ
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    I’m going to answer my own question in case anyone is interested (I spoke to an accountant.)
    The company is worth nothing now as no share capital. The shares would have to be lodged as unpaid shares if a higher value was attributed. But you cannot claim a capital loss on unpaid shares. In fact, any unpaid shares can be considered as a debt owing to the company. So if a third party was owed money the shareholders might be called upon to pay for those unpaid shares.

    The loan coming into the company is on the company books as a debt and the loaner cant claim a capital loss on that either unless they are a bank or similar.

    The best way to protect the ‘investors’ is to issue them a special class of shares that don’t give them any extra voting rights or dividends ( they still have rights on the ordinary shares we all are issued) and these special shares can be redeemed as they get dividends on the ordinary shares.

    #1162510
    StevenMelbourne
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    Interesting I was looking at similar things, thanks for sharing!

    Cheers,
    Steven

    #1162511
    akagrp
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    Hi Tracy

    Valuing a startup is not always easy, it would really depend on what you wished to achieve in the first stage, the reality if you were issuing shares to unrelated parties they would be via a new share issue and not a disposal of your shares, which will not result in Capital Gains tax to you, just mean your interest in company is diluted.

    In situations like startups what we often do with our clients if the situation warrant it and the plans are to onsell to others down the track, is to introduce the investors contributions as Convertible Notes, ie initially debt which is a given set of terms, they then have the option to convert the CN into shares down the track. You will find most savvy investors in startups will not go for special class of shares, they often want Ordinary Shares

    Personally I have never come across a Startup that has Nil Value, as the IP/Concept always should have a value especially when taking on investors

    PM if you wish to discuss in greater detail, as startup and investors is a space in work in with a large number of our clients and getting the initial terms is critical to avoid the possibly of loan recalls etc

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