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FLCORPLAWYER
FLCORPLAWYER, Attorney
Category: Business Law
Satisfied Customers: 4633
Experience:  23 Years business & securities law, NY and FL bars. SEC all states.
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I am writing from California. My friend owns a private corporation

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I am writing from California. My friend owns a private corporation of which he is the only employee at this point, but he is doing quite well for himself. I am planning to join him full-time on a revenue-sharing basis. I will not be his employee, but rather an independent contractor on paper, and we expect to grow the business together. We are trying to come up with a legal agreement that will define how I will be compensated for my contribution over the years. My questions are: 1) If my friend gives me certain equity in his company, and later we split, and I take my vested equity with me, can he dissolve my shares and make them worthless? I am wondering if he can issue more shares and dilute my equity, or he could close the company down and start a new company just to make my shares worthless. That will help me decide if I should join him on equity basis or revenue-sharing basis, or a combination of both. 2) My concern is that he may never sell the company, which will make my equity worthless anyway. So I'm wondering that in addition to revenue sharing, if I make an agreement with him to add a "severance" component to the agreement -- meaning if I quit working with him for any reason, he will pay me a severance when I quit, so in a way, when I leave, I get compensated for whatever value I have added over the years. Can a revenue-sharing agreement and severance agreement hold up in court, in case things don't work out between us and I have to fight for my share? Thanks.
Submitted: 4 years ago.
Category: Business Law
Expert:  FLCORPLAWYER replied 4 years ago.
You are trying to complicate a fairly simple problem. He is never going to give you more than 50% of the company, so he is always going to be in control of it. This means he can issue more shares and dilute you down to nothing, he can wind up the company, he can sell it to another entity, or do anything else he wants. So if you are taking an equity stake in the company, you need a lawyer to draft you a contract of sale and purchase of the stock which contains an "anti dilution" clause, and a "take me along" clause, which will protect your shares if he ever decides to take the company public. A better approach would be to sign an independent contractor agreement for a fixed term that pays you out over the long term on your customers if you leave the company.
Customer: replied 4 years ago.
Thank you for confirming to me that taking equity is not worth it.

So how about this:

I sign an independent contractor agreement that will pay me X% of the revenue delta generated since I joined him. Revenue here means gross receipts without deducting anything.

If my friend sells the company while I am working with him, he pays me Y% of the sale price, which is in addition to the X% revenue share.

If my friend terminates my contract for any reason, or I terminate the contract for any reason, my friend pays me a fixed severance amount at the time of leaving, so I at least take home some of my contribution with me.

How do I protect myself if my friend terminates my contract just before selling his company, so he only has to pay me severance and not the Y% of the sale price?

You mentioned: "sign an independent contractor agreement for a fixed term that pays you out over the long term on your customers if you leave the company."

This sounds very interesting. Can you elaborate on that?

My concern is that I want to go with a "pay-as-you-go" model that compensates me for my contribution in cash every year with no equity or other strings attached. That way I don't have to worry about him not paying me after we part ways, because I don't trust what a person can do once I am no longer working with him. Why would he want to part with a certain share of the revenue to somebody who isn't even working with him? And how do I audit him once I have left? He could underreport his revenue to me, etc etc. So I would rather go with a pay-as-you-go model, so what model do you suggest?

This is a long question, so I will up add a good bonus for this question. Thank you for the help.
Expert:  FLCORPLAWYER replied 4 years ago.
You are signing a contract with the company. If new people buy the company, it still has to honor your contract no matter who owns the stock in the company. The contract must call for a payout to you on the sale price if the company is sold within XXX months of you leaving. After you leave, you must get revenue from your customers who you leave behind for XXX months.
FLCORPLAWYER, Attorney
Category: Business Law
Satisfied Customers: 4633
Experience: 23 Years business & securities law, NY and FL bars. SEC all states.
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FLCORPLAWYER
FLCORPLAWYER
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23 Years business & securities law, NY and FL bars. SEC all states.