I had started a professional services business few years back. While starting up, I had raised some investment through friends and have given them a stake in the company. Over the years, I have returned their investment plus some profits. Now the company is stable and I wanted to explore the options I may have to propose an exit plan for my investors. The problem is that we do not have a shareholder agreement/ clear exit clause in place. The investment was also raised on a short term loan basis mostly for working capital deficits. I would like to understand the process to facilitate exits for my investors as I would not be neeeding any further investment.
Well if a friend/family member gives you money for a startup the standard expectation is to get paid back in a reasonable amount of time with some interest if possible. Most of the time it's done because they have a little extra money and they trust in you and your idea. Often times these are just done on a napkin or some casual written promise to pay it back.
If you discussed equity then your situation is a bit more complicated. Since you have now paid them back with interest (profits) there may be no more expectation. But if there is then you should check in with them and let them know how much of the company they own. 2%, 5% ... also if this is true and you want them to truly have equity you have to get some documentation in place. This needs to cover things like if they get a vote or not on major company decisions or if they are a silent partner. You also need documentation in place to make sure they aren't held liable for any major debt you may or may not ever get in to.
So if they get equity you need to formalize everything and it wouldn't hurt to have a good business lawyer put that together for you.
If you don't want to go through that you can casually say ... "Well thanks for the money and investment, that's been paid back and in order to keep things simple I would like to buy you out of your 5%. I figure the business is worth $XXX,XXX based on revenue and expenses this year and our projected revenues next year and in the future. So here is a check for $X,XXX .
Thanks for your help."
"If you want to stay a partner in the business it's going to cost $X,XXX to get the documentation setup, you're taxes will become more complicated, you may be liable for things the business gets in to ... etc. If you want to stay in we can move forward with the docs... and this is how I expect to pay dividends out to shareholders in the future... and you won't get a vote on business decisions ;)"
Something like that is probably the best route.
You really have to clarify this with your investors, because what you're describing suggests that neither you nor they agreed even informally whether this was intended fundamentally as a loan, whether it was equity investment, or whether it was meant to combine elements of both.
But it sounds to me as though your view, at least, is that you wanted a loan, and you sweetened the terms (because your friends were taking a risk on you) by making them shareholders.
If that's the case, then you have two separate points to resolve.
First, you want to repay the loan. And if there was no agreement, you'll have to negotiate (retrospectively) a rate to work out what payment settles the deal.
Then, you have shareholders. They are part owners of your business. If you want to buy them out, the figure you should expect to pay isn't about the loan amount, it's about the value of the business today. Large or small, it doesn't matter, that's how equity works.
I get the impression that maybe you regret your impulse to write equity. But you did, so honor that. If that's a windfall for your friends, remember that it was them who made your success possible. They shared the risk, now they're sharing the reward. And maybe some day you'll help someone else get their start.