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kattorney, Attorney
Category: Business Law
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Experience:  16 years experience with a concentration in business, corporate and contracts law
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I put in $2000 investment and half a year of time as a LLC

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I put in $2000 investment and half a year of time as a LLC member in return for 30% of a company. The total share value was set at $100. ($1 a share). My partner wants to buy back 25% for $25 as I need to spend more time elsewhere. I keep 5%.
He does not want to give a anti-dilution clause since future investors may bark at that. Is it reasonable to accept $25 for my share? I will continue to help him and want to keep a small stake. Concerned that my stake of 5% will be nothing in the future and I give this all up for $25. Any advice is welcome.
Submitted: 2 years ago.
Category: Business Law
Expert:  kattorney replied 2 years ago.

Kathie Russell :

It doesn't sound reasonable in return for a $2000 investment, but I don't know anything about the value of the company. It is very possible that your 5% will be worth nothing in the future. Is there anything in your written agreement that requires you to spend time in addition to your monetary investment?

Kathie Russell :

Perhaps you could offer some sort of deal whereby you receive some amount of profits up to the amount of $2000, and once your original investment is recouped you agree to sell the 25% for $25 and remain a 5% owner.

Customer:

right now the company is still in start-up phase so the value is low. its a clothing/adventure company so it will take time to see profits, but that is to be expected. Once it generates profits - even just to $2k- selling 25% equity for $25 makes no sense to me because then the company is starting to have value. I don't know either how to value a company so find this difficult negotiation with my partner.

Customer:

Is it common to ask for an anti-dilution provision or what are the issues with that? My partner says that investors do not like to see that.

Kathie Russell :

Investors will likely not accept that.

Customer:

why not? Any other ways to protect my stake?

Kathie Russell :

There needs to be some mechanism in place to allow you to recoup your investment

Customer:

yes of course

Kathie Russell :

You could refuse to sell and keep your 25% stake

Kathie Russell :

If there is nothing in writing to require you to spend time working for the company

Kathie Russell :

Or, you could agree to the sale on the condition that the company give you a promissory note for your $2k investment with interest

Customer:

He wants to buy it though so this will lead to trouble. I need to protect my 5% though..that is my question. any protection from that or not possible?

Kathie Russell :

No

Kathie Russell :

If you are a 5% owner you are at the mercy of whatever happens with the company.

Customer:

so the whole 5% is pretty much useless if he attracts a lot of other investors.

Kathie Russell :

Yes

Kathie Russell :

But then again so is the 25% if he attracts a bunch of investors

Kathie Russell :

The botXXXXX XXXXXne is if you want to get out, the best you can probably do is try to recoup your original investment and cut ties. Hope that the 5% might be worth something in the future but don't bet on it. It's a long shot.

Customer:

ok so I may have to ask for 10% just in case

Kathie Russell :

Or just refuse to sell and keep your 25%. Maybe he knows something you don't know about what is around the corner.

Customer:

ok and he wants me to release him of all claims.

Kathie Russell :

It would be better than 5%

Customer:

should I agree to a full release or also not agree on that

Kathie Russell :

I'd be skeptical.

Kathie Russell :

Is it possible he knows of a big order or something that might change the financials of the company?

Kathie Russell :

Well, if you are not willing to cause trouble by refusing to sell for $25 are you going to be willing to sue him for something? If not, the release doesn't matter.

Customer:

ok yes he is a good friend. probably not going to sue him. just wanted to know if a release makes sense if I keep a stake

Customer:

it seems for people that get severance etc

Kathie Russell :

My advice would be to hang on to your 30% of the company. I see no reason to sell it for such a nominal fee. If you are doing it just to avoid a problem, you might as well just view it as writing off your investment in the name of friendship - because that is what it is.

Kathie Russell :

Release of claims just means you won't sue him for basically screwing you out of your percent ownership of the company

Kathie Russell :

Because that is what he is doing.

Kathie Russell :

(And obviously knows it)

Kathie Russell :

Not trying to cause trouble between you and your friend, but you either have to accept this for what it is and realize that you are being left with nothing, or try to hang on to something and cause friendship problems. That is the botXXXXX XXXXXne here.

Customer:

he does not want me to have 30% ....so thats the problem but yes if you put it like that, I will have to rethink this

Kathie Russell :

Giving him what he wants preserves the friendship but it is not a wise business decision. It's up to you what is more important, but there isn't a legal solution to this problem. Only a business decision.

Kathie Russell :

(or a frienship one)

Kathie Russell :

Best of luck to you.

kattorney, Attorney
Category: Business Law
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Experience: 16 years experience with a concentration in business, corporate and contracts law
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