Question about Share Ratios for a LLC 4
I received this very good question from a reader about share ratios when converting from a partnership to a LLC. Note I have dropped his name and changed the details a bit
Let me ask you…I am about to form an LLC for a small business that I have been running for several years. I have one major partner, and I am trying to get some advice on whether I should split the shares 50-50, or if I should retain a majority (55-45) since I was the founder and ultimately have the largest assets into the business?
Firstly, much more than a legal issue this is a human issue. It really depends all on your relationship with the partner. The simple answer from a legal standpoint would be to retain the majority, because you don’t know what could happen in the future.
All this being rationally true it could work against you, maybe your partner would feel cheated because of this and start bearing a grudge. As in any relationship grudges have a way of rearing their head at some point in the future, when you least want them to do so.
To sum it all up while rationally you should have more because you are the founder, you need to avoid grudges against you, but then again you also need to avoid grudges in you against your partner. It is all together better to avoid the times when you need that controlling stake, than having a remedy after the fact. Condoms over abortion!
One thing you might try is to offer a 50%/50% revenue split, but retain control. That seems like a good compromise. Stuff like that you can specify in the LLC agreement or in a separate contract.
Also remember I am no lawyer, then again this is a human subject and lawyers only ever should get involved when the human beings are past talking.
Anyway if anyone else has questions, please send them to me at pelle@stakeitout.com and let me know if you want to be anonymous. Of course I am no lawyer and I my answers might cause you to loose your house or worse your powerbook. Also feel free to comment with your own experiences and opinions below.
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50/50 is bad when one wants to go west and another wants to go east—there is no one in control.
One idea could be 49/49 split, and then to have one 2% advisor (outsider, who both parties currently trust and who can “take the heat” if so required) and in case of east/west tournament—that 2% share is in control.
(And I’m not lawyer either.)
Pelle and Juha,
I disagree with all three approaches proposed.
Contracts are, in my opinion, made only to secure one another when things go wrong. That can be two companies selling services to one another or a limited partnership like the above. Therefore, go into the partnership with best of intents. If the intents are that you will each contibute equally, go in 50/50. If the contribution is otherwise, compute and agree on that figure.
The contract, on the other hand, should stipulate what happens if things go wrong and you decide to break up. I do not know what is sold (services, software, etc.?), but figure what happens with clients, rights to software written and other IP. What if one party want to stop and the other continue? How is the value of the company computed (outside layman, accountant?) and on what terms can this sum be paid?
My two cents worth.
/n
Nikolaj,
mine was just an idea, food for a thought, not an approach. Sorry about that.
What I tried to say, that not all “things going wrong” have to be like life and death things. More likely normal daily pragmatical things like does company go to west or southwest.
And there is always two timezones in going into the partnership: now, today; best intents—and future, tomorrow; who can see there from here.
For the next person whom reads this post, the best approach is to maintain control. It’s not about having the negative mindset before entering the deal, it’s about he or she who has the vision of the business must maintain control. Once the vision is gone, the business is just another company and it’s time for retirement.