I recently received, via Quora, a private question about setting up an LLC membership interest (rather than shares of a corporation) with reverse vesting (see Rewarding Key Personnel: Restricted Stock or Options?). That question, and my answer, are reproduced below with minor editing.
Q. I am starting a company and forming as an LLC. My co-founder will received a reverse-vested membership percentage. I’ve found plenty of sample restricted stock agreements, but nothing for LLCs and memberships. Do you have any suggestions where I can find a sample agreement?
A. Sorry, I know of no such document. I believe there are two somewhat-related reasons why this is the case:
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A short while ago, I answered a Quora question about whether and why a startup might want to form a general partnership. The question and my answer are reproduced, with emphasis added, below.
Q. What are some of the reasons a business might organize itself as a general partnership? Considering all the liability risk that general partners might potentially face, why not organize as a limited liability company? Was there an era when the general partnership was an attractive form and, if so, why?
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In an article published today (Chasing the New Angel Investors), the Wall Street Journal discusses why entrepreneurs must work ever-harder to persuade angel investors to invest.
According to the article, although seed and startup angel investment has increased, there are several reasons why that money is more difficult to attract:
- Since the recession, many angels have become more demanding, looking for proof of marketplace acceptance rather than a hunch that it exists.
- Angel groups, which syndicate deals among their members, have a more-formal review process that may involve discussions by dozens of potential investors.
- With less venture capital available, angels are more concerned about whether a company can grow to profitability or a successful exit.
The article’s advice for entrepreneurs: Have something to show, know your business thoroughly, and polish your pitch.
Dana H. Shultz, Attorney at Law +1 510 547-0545 dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.
The evening of Wednesday, November 16, the Silicon Valley Academy of Startup Entrepreneurs (SVASE) will present “What’s Hot – What VCs Like and Why” as part of its East Bay Series. Here is the event description:
To build a fundable company, you need to know the areas that investors are focusing on. Venture capitalists specialize in identifying important and lucrative opportunities before they become trends. So, what are VCs intrigued by today? Where will their money be invested? What is the effect of recent economic conditions? Learn what you will need to build a company that capitalizes on the latest developments.
Panel members will include:
- Brent Ahrens, Canaan Partners
- Cindy Padnos, Illuminate Ventures
- Randy Hawks, Claremont Creek Ventures
The event will take place at the beautiful Crow Canyon Country Club and will include a tasty buffet dinner.
Dana H. Shultz, Attorney at Law +1 510 547-0545 dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.
The evening of Wednesday, October 19, the Silicon Valley Academy of Startup Entrepreneurs (SVASE) will present VCs Uncensored as part of its East Bay Series. Panel members will include:
- Carl Showalter, General Partner, Opus Capital
- Xander Mahony, Investment Professional, Draper Fisher Jurvetson
Event description:
Hear directly from venture capitalists on what they love, hate and worry about when working with entrepreneurs. Our panel will discuss mistakes they see entrepreneurs make, pitfalls they help companies avoid, and the challenges of rapidly growing a business. They will talk about valuing companies, negotiating deal terms, raising additional rounds, replacing CEOs, and much more. This lively and candid discussion will open your eyes to the world of VCs and will help you better understand and work with them.
The event will take place at the beautiful Crow Canyon Country Club and will include a tasty buffet dinner.
Dana H. Shultz, Attorney at Law +1 510 547-0545 dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.
This post is based on a Quora question in which a user who already had invested money in his corporation wanted to know how he can invest an additional amount. My answer, reproduced below almost verbatim, starts by summarizing the steps for an initial equity investment.
Let’s assume you did your startup paperwork properly: The board of directors approved issuing some or all of the corporation’s authorized shares to you in exchange of payment of certain consideration; you deposited that consideration into the corporation’s bank account; the secretary recorded your share ownership on the corporation’s share transfer ledger and issued a share certificate to you.
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In an article yesterday (Can’t Afford an Office? Rent a Desk for $275), the Wall Street Journal observed that use of shared workspaces – renting a desk in an open space, rather than renting an office – is increasing throughout the United States.
Such resources have been used for many years by technology startups here in the San Francisco Bay Area. The article specifically cited Plug and Play Tech Center in Sunnyvale (which is exploring expansion to other cities).
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This post is based on a question that I answered on OnStartups.com. The short answer is “Yes, an undocumented immigrant can form a corporation.” The rest of this post is adapted from the full answer that I provided.
You can form a corporation – no problem. I have helped dozens of foreign clients (non-citizens, no social security number) go through that process.
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Sample Share Certificate with Legend from Attorneys Corporation Service, Inc.
Last year, I wrote about the importance of placing appropriate legends on corporate share certificates (Why Do We Need a Corporate Records Book?) and limited liability company membership certificates (Should My LLC Issue Membership Certificates?). This post provides more details about why legends are required and how they can be printed on the certificates. (Although I will use corporation-specific terminology below, the considerations are similar for LLCs.)
The legend that routinely appears on my clients’ share certificates (I have the company that prints the certificates include it) is one stating that the shares have not been registered under state or federal securities laws. The reason: To put the shareholder on notice that, under applicable securities laws, the shares cannot be transferred unless certain circumstances are satisfied. Here is an example:
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An entrepreneur who was trying to prepare a limited liability company (LLC) Operating Agreement on his own (apparently using someone else’s as a template) was puzzled by the concept of “sharing losses”. I could tell right away that he was not familiar with two fundamental concepts of LLC accounting: Allocations vs. distributions.
Before going further, I need to make two disclaimers:
- This post is not about taxes.
- The following discussion is extremely simple, addressing only the most basic considerations. One of the great things about LLCs is that the members can agree to make allocations and distributions in any way they desire to meet their business needs. As a result, LLC accounting can be far more complex than the following might suggest.
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Dana Shultz is a business-savvy lawyer located in Northern California's San Francisco Bay Area (in the East Bay, near Oakland) who has in-depth knowledge of law, business, technology, and the needs of startup and early-stage companies.