Buying a share in a private company is very different from owning shares in an employer like Google or AIB which are publicly quoted.
In the case of a public company, you should definitely sell down your shares if they form a significant part of your wealth.
I don't think that this applies to the same extent to a private company. If you see yourself as a long-term employee and possible director of the company, it is ok to own shares in it. In fact, it is probably a good thing. It gives you a say in the direction of the company. You are part of the company, a bit like a partner. Yes, there is a risk that the company might go bust and you lose a significant part of your wealth, but at the right price, it is worth doing.
But there are big downsides
Company shareholders often fall out. If one person, usually the founder, has a majority stake in the company, they can dominate the others. So while you might own 10% of the company, in effect, you only have persuasive power and that might be worth nothing.
There are clauses in the Companies Acts to protect minority shareholders, but do you really want to go to the High Court to enforce it?
The dominant director can mess about by giving themselves a very high salary which wipes out profits, and you might not be able to do anything about it.
If you decide to leave the company, it will be very difficult to sell your shares. And if you are setting up in competition with them, they might make it even more difficult.
You might get on great with the founder today. But in 10 years, maybe the founder's son comes into the business and wants you out.
Or you might get on great with the founder today, but what happens when the company hits tough times and salaries have to be cut?
So, if you progress, then you must have a shareholders' agreement. This would cover, amongst other things:
- How salaries are to be determined
- Rules on calculating profits
- How the shares are to be valued on exiting the company especially on retirement.
- Access to the accounts and direct access to the auditor - who should be genuinely independent and not a member of the same golf club as the founder
- How big decisions such as the sale of the business are to be decided.
- Rules on borrowing
- Rules on appointment of directors
- Employment of relatives and friends of the directors
- Major investments and company strategy
Brendan