What you need is an attorney you can discuss the detailed facts with and come up with a comprehensive strategy, such as what happens if they don't perform (about regaining your shares) and what happens if they perform improperly subjecting the company to liability. You either need a shareholders' agreement or other type of contract. Part of the advantage to having your own counsel is considering questions you may not know to ask. Your facts don't indicate sufficient facts to give you anything approaching a secure agreement, and the financial aspects you inquire about are impossible to answer in the abstract. My personal preference is to give away 0% of the shares and X% of the income, defining income very, very carefully. There are great business attorneys on Avvo near the Santa Cruz area. You may also contact our office via my Avvo profile.
The above is general legal and business analysis. It is not "legal advise" but analysis, and different lawyers may analyse this matter differently, especially if there are additional facts not reflected in the question. I am not your attorney until retained by a written retainer agreement signed by both of us. I am only licensed in California. See also avvo.com terms and conditions item 9, incorporated as if it was reprinted here.
You have a number of options at your disposal and you should consult with a corporate attorney in your jurisdiction. Optimally, as mentioned above, giving up equity should be a last resort. There are a number of ways to compensate people that work for your business whether they are employees or independent contractors in a manner that could resemble a stock option plan but in reality is just a cash bonus (e.g. phantom stock). Speak with a knowledgeable corporate attorney in your jurisdiction about the best plan of action.
The aforementioned opinion does not constitute legal advice and is for informational purposes only. See an attorney licensed in your jurisdiction for competent legal advice.
With the caveat that there are doubtless many facts not laid out here, this sounds like a very bad idea. If I understand correctly, two people have been running the business. At the moment you own 100%. The plan has been to give each of the other two 40% of the business with ou retaining 20% of the equity and 20% of the profits. In my view, absent several modifications, this is potentially a disaster waiting to happen.
The threshold question is what are you trying to accomplish? Why are you giving away 80% of your business? Are you seeking to segue out of it or are there other factors. If you are looking to reward good work, there are better ways to do it. By giving away 80% you lose control of the company and you will be at the whim of the others. You can protect yourself somewhat through a shareholders' agreement or the like, but I do not think this is a wise path, regardless of your end goal.
There are a number of ways to do this.
Since your are an S Corp the profits are typically distributed in proportion to share ownership, so you might not want to give/transfer an 80 percent share to them.
Giving them a supermajority share would also allow them to control the business, and maybe force you out or dillute you ownership share, unless you have a good shareholders agreement to protect you.
Other options might be to retain majority ownership, but provide for bonus compensation to them if certain profit levels are maintained.
Or you might be able to have two classes of stock, but this could affect possibly your S Corp status.
Another concern is whether the change in ownership might affect your lease.
If you are giving up control of the company you also might not want to be the only person liable on the lease.
You usually don't just "give" someone shares, but you grant or transfer shares in exchange for some consideration, whether it be money, services, etc.
Giving them something could result in gift tax liability, depending on the amount of the value of the shares exchanged.
There could be other tax issues.
What kind of licenses are involved here?
Some licensing agencies require notification or approval of changes in the identity of the persons doing business under the license, and failing to do so could affect the license.
Please give us a call if you would like to discuss these and other issues in greater detail.
San Francisco CA
This is NOT legal advice, just a general discussion of the law, as we are not familiar with the specific documents and facts of your case, etc. Please consult with a competent attorney in this area of the law for specific legal advice regarding your particular case, as the advice may vary depending on the facts.