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Rakhi Vasavada
Rakhi Vasavada, Financial and Legal Consultant
Category: Finance
Satisfied Customers: 4474
Experience:  Graduated in law with Emphasis on Finance and have have been working in financial sector for over 12 Years
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What documentation will investors require when buying

Customer Question

What documentation will investors require when buying membership interest in an LLC that is used to buy shares of startup companies?
Submitted: 1 year ago.
Category: Finance
Expert:  Rakhi Vasavada replied 1 year ago.

Dear Friend,

Hello and welcome. Thank you for providing an opportunity to assist you.

All you need to do is to have a proper SALE / PURCHASE of LLC Interest Agreement. Such documents are standard in nature. The following two are very good example of this.

http://www.sec.gov/Archives/edgar/data/1133470/000119312512454567/d435941dex101.htm

http://www.lawmart.com/forms/bus-lc11.htm

IN ADDITION this, if you are purchasing an interest in a start up company, you will need to have an "EXIT CLAUSE" in place. Exit Clause details HOW you will liquidate your interest in the LLC when it appreciates in value. Such exits are usually done when the company lists OR finds an alternate investor. FURTHER, you will need to detail the EXTENT of your managerial involvement in the company. By this I mean, you will need to be very specific if you would just be and investor OR will have a seat on the board OR will have any involvement in the day-to-day management of the company.

So, "Exit Clause" and the "Participation in Management, if any" are the TWO ADDITIONAL things that you will have to include in the above sample agreements.

Apart from these, there are no specific documents that you require.

I am sure this would help.

You may please leave a positive rating if this helps as this is the only way we are compensated for assisting you. Alternatively, you may revert back with a reply if you need further assistance or if I have missed out on any aspect of your question.

Warm Regards,

Customer: replied 1 year ago.
Can you provide examples of the exit clause and participation in management sections? Will the cap table in the operating agreement of the LLC stand in place of the sale/purchase of LLC interest agreement or are both necessary?
Do I need to provide a copy of the purchase agreement of the shares in the startup company and a copy of the stock certificate?
Expert:  Rakhi Vasavada replied 1 year ago.

Dear Friend,

Hello and welcome again.

So far as exit clauses are concerned, it is very much subjective and it is also guided by the nature of the business and its gestation period by the time it becomes profitable and revenue / profit generating. However, the following resource will help you prepare it that best suits your requirements. Note that exits of such type are always strategic in nature. It usually results into the company going public OR second round of Private Equity Funding that takes place. You can chose to agree that either in case of company going public OR in subsequent private placement (second round of finance) YOUR SHARES / STAKE would be offloaded first in that tranche.

http://www.exits.com/blog/exit-strategies-for-angel-investors/

Yes, both the cap table in the operating agreement and the mention of % interest are necessary. Yes, providing the copy of the agreement is also necessary.

I am sure this would help.

You may please leave a positive rating if this helps as this is the only way we are compensated for assisting you. Alternatively, you may revert back with a reply if you need further assistance or if I have missed out on any aspect of your question.

Warm Regards,