Quote: (04-10-2016 03:16 AM)frozen-ace Wrote:
Do you guys have any advice / insight when considering forming/ joining a partnership? Anything I should consider or watch out for?? I believe it will be an LLC (taxed as partnership, not a Corp but need to confirm that).
I had some acquaintances (no family or friends) reach out to me to see if I was interested in joining their startup. I would have to buy in and it would be a minority share. It is very risky, but if it takes off the sky is the limit. I will keep working my day job and work on the startup on weekends / evenings.
This is all new to me. Should there be something about right of first refusal if someone wants to exit the partnership/ sell their ownership? What about adding new partners? What happens to ownership if the main partner dies, does his ownership goes to his heirs (and then they own majority stake)?? What have you guys seen and experienced in this area?
1. Make sure you get all the information regarding the entity structure of the business that you are partnering with. If its an LLC taxed as a partnership (or any form of LLC, for that matter, including an LLC taxed as a corporation), then it will have an
operating agreement that will set forth the internal governance of the Company. Make sure you get a copy of this agreement and conduct a preliminary review to determine the following:
a. see how the income of the business is distributed (does distribution follow ownership? So for instance, is a 25% owner entitled to 25% of distributions?) When are distributions made? Who has authority to make distributions? Who decides if company should distribute profit or re-invest? How is this decision made? Think about whether you have any problems with this issue.
b. What are the roles of the parties involved? Is there a CEO? Is there a manager? who has the authority to make major decisions?
c. How are major decisions regarding the direction of the company made (including the hiring of new employees / the payment of salaries / etc? What are the voting requirements? What % equity do you need to vote - you are buying a stake in the company but what if your partners make bullshit decisions and you have no say? maybe negotiate for a lower $ investment for the same stake?
d. Are there different levels of ownership? (like preferred LLC units with superior rights?)
Keeping note of the above, make sure that you understand the % of the Company that you will own, and what effect that ownership will have on your ability to vote.
In the case there is no operating agreement, or the agreement doesn't address the issues above, you need to bring this up - this means the parties are not very sophisticated in regard to business. Theoretically, this may be a good or bad thing. For instance, if they are very good at what they do (they are technical founders), then the startup could still be very successful, now is the chance to exercise yoursignificant bargaining advantage and say in drafting an operating agreement that could be to your benefit. However, if these are just straight business guys (without some kind of technical background), then I think they don't have much experience and maybe the business may not be worth your investment.
2. Generally if its a traditional startup which will be offering equity and seeking investment, then you generally need to be organized as a corporation (big-time institutional investors don't invest into LLCs due to tax issues), usually in Delaware. If thats the case, you need to make sure there is a shareholders agreement which outlines the relationship of the owners of the corporation. The shareholders agreement is different in form from the operating agreement, but it generally addresses the same issues - look at point #1 above to see what to look for.
3. Yes there should definitely be a right of first refusal, and similar provisions- if someone decides to sell their equity, there should first be an offer for the company to buy out that interest, and if the company refuses, an offer for the remaining equity holders to purchase a pro rata share of that interest. Only then, whatever remains, can it be sold to the intended party.