ClunkintheUK

It would. It would not be a liquid value, like BP shares or any of the FTSE 100. but exactly the same concept. They would probably put a clause in that you couldn't sell your share without giving them first refusal, or you would forfeit it if you left the company in the first 4 years of them buying it.

So say they bought it for £1m and gave you a 1% share as a key person. To fund this they (through the company) took out £500k of loans (which is the starting point for most leveraged finance). The company is 'worth' £1m but has £500k of loans on its books, and £500k of equity. You own 1% of this equity worth £5k, your share.

In 4 years time, they come to sell the company for £1.3m (30% increase in value) and they have used cash generated by the company to bring the debt down by 200k. So of the £1.3m, 300k pays down the debt and there is £1m of equity (a 100% profit for the owners). Your 1% share is now worth £10k. which is at 25% annual return. If they take cash out of the business, say £100k then you will receive £1k.

Once you have the share (assuming no forfeit for whatever reason) they cannot stop you selling it, not legally anyway. If they sell the buyer has to match that price for all shareholders, though you can decide to keep it with the new owners. In fact you would probably be able to negotiate with the new buyers, and up it to 2%. They would do it for exactly the same reason that the first ones did it. Keep key players on board. There are, however lots of nuances around the negotiations. They won't give you squat if they don;t care if you leave. They won't buy it if you are generating 50% of the profits, its too big a key man risk.

You would match private equity returns, which can be huge 3-400% over 7-9 years in some scenarios. The downside risk is that the company goes under and your share become worthless.

Also, the returns from the sale would be taxed at 20% (capital gains tax, not income tax). It is possible it would fall into the entrepreneurs allowance and only be taxed at 10%, but I am not sure of the definitions in that. If I had a genuine chance of owning a part of an SME, particularly one that would grow and even better grow off the back of my hard work I would grab it and not think twice.

The scenario above is one of the less aggressive types of PE purchase. I personally would be looking to have the share or the option as part of my incentive as a key employee. It is even better if it can be given to you before any purchase would happen. The profit sharing is the first step towards being able to ask for this, but only you can know if it is a long term possibility.