How dividend payments work?


1

So let's make an example story:

I'm the founder and the only developer of a web startup. Currently there is no one else other than me in the company.

I've added a sales guy, wishing to give him dividend 20% of the profit as compensation.

The company type would be a C corporation.

Now, I need answers for the following questions:

  1. Will the sales guy get a 20% cut if i get funding?
  2. Does giving him %20 of dividend share, means i still have %100 of the company ownership?
  3. What happens if the company got acquired? ie. for the sales guy.
  4. In regular stock shares, I can hand him a stock certificate, but what about Dividend payments?
  5. is it a good idea to get him %4 of dividend + %16 of stock shares instead?
  6. Are stock shares alone unprofitable untill selling them?

Thank you in advance.

Equity Legal Business Stock Options

asked Jul 7 '11 at 11:57
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Ryan
139 points
Top digital marketing agency for SEO, content marketing, and PR: Demand Roll
  • I think what you really want is to offer profit sharing or binus structure - not equity/shares for this sales person. – Tim J 9 years ago

2 Answers


1

(not a laywer, not in the US)

Ok, I think your mixing a few concepts together (or I am) ...

  • A share is a "thing" you hold which reporesents a "bit" or fraction of a company.
  • Dividend. when companies make a profit (income - Expenses) they often pay a dividend on a percentage of that profit (the majoirty of the profit goes back into allowing the company to grow in the next year).
  • The dividend (at least in Australia) can be fully franked or on non-franked ... Franked pretty much means the tax has been paid by the company before handing over the money to the shareholder. Non-franked means the tax is the shareholders problem.
  • You can have different classes of shares some which allow voting on company direction, some which pay dividends and some which don't.

So you can choose to pay dividends in a company at any point (typically yearly or quarterly), most startups don't pay dividends for the first 5 or 10 years because they are reinvesting every cent back into make the company grow.

Now shareholding...

If your company has 100 shares, to make the math easy but its more likely to be 1 million shares or something easier to hand out small bits.

Your new sales person would be given 20% (20 shares) in your company, you by default hold the remaining 80% (or 80 shares). When you bring on investors you both give up some of your shares, normally in equal proportion ... you give 30% to a new investor, you give up 24 of your shares and the sales person gives up 6 of theirs.

Ok now you have assigned shareholding you can pay dividends on the shares.

Imagine you make $100,000 profit and decide to pay 10% of that profit as dividends.
This means you have $10,000 to spread amoungst 100 shares therefore $100 per share.

  • You have 56 shares thus you get $5600 of the $10,000
  • Your sales person gets $1400
  • Your investor gets $3000.

The same happens the next year when you split $200,000 in profit.

Voting rights. Same as paying dividends, when it comes to decisions about direction of the company, when to sell out, replacing the CEO and senior staff, when to enter a new market etc the shareholders get together and vote on the direction ... its their money at stake.

On sale of the company. When you sell the company each share is effectively bought from you at an agreed amount say $10,000 per share. You each get paid accordingly.

Does that help answer the question at all?

answered Jul 7 '11 at 15:11
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Robin Vessey
8,394 points
  • Thank you Robin for clarification! – Ryan 9 years ago

1

Dividends are paid to the shareholders of the company in direct proportion to their shareholding. So for example, if you held 100% of the shares, you would receive 100% of the dividend. Thus, in order to give your sales guy 20% of the dividend, you would also have to give him 20% of the company. Clearly you don't want to do that. Unless you want him to have some ownership of the company, you don't want to hand him shares (because shares == ownership).

Shareholders make money either through dividends from company profits or by disposing (selling) the shares. The latter can only really happen if the company is traded on a public stock exchange or is acquired by another company.

answered Jul 7 '11 at 18:33
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Edralph
2,333 points

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