Legal question for all of you forum lawyers...

[Scott Murdaugh]

Hey guys,

Your help/advice would be much appreciated.

Let's say "hypothetically" that I was planning on launching a publishing company...

And I'm "hypothetically" planning on launching 5 products within this company, across various niches.

In order to expedite the process, creation of the products, marketing, etc, I was interested in selling 50% ownership at start up.

And of that 50%, I want to give the option of selling it in 10% chunks to minimize investment/risk for those who want to come on board.

So the buyer pays $x for 10% of the company's net profits on a monthly basis...

This isn't a question about whether I could sell the concept, or whether other alternatives, like taking out a loan or funding everything myself are better alternatives... This is just an idea I'm kicking around and would like feedback on the logistics of it.

Is there a legal way to do this without becoming incorporated and selling shares of the company?

I figure it would be akin to paying a project manager for copywriting, product development, market research, promotion, etc... And then we have a contract that states in exchange for the investment they get the % of profits over time.

This is one of those 2am "hmmm..." kind of ideas... I'd be curious to hear your answers.

I don't necessarily want to hear things like "who's going to invest in an upstart company with no income yet".... I get that.

I'm interested in hearing if this could work... And if it could work without becoming a corporation and selling shares (stocks).

Thanks!

-Scott

[Chris Wilkinson]

Scott.

Far be it for me to offer unqualified legal advice, but here goes...

I suppose if you own the company you can give, barter or sell as much of it to other people as you wish. Just write an agreement stating that they now own X% of your company, any future profits and possible losses, it would be a good idea to pay a lawyer to write the agreement.

My main concern would be how much control and input the other co-owners of your business would have. Would you say allow them to make financial or managerial decisions? Would you give them a company credit card etc.

You could find yourself in a situation were you no longer have any control of the direction or aims of a company that was originally your idea.

But as with all unqualified legal advice, take with a pinch of salt. Although I hope I've given you some other things to think about.

Take care
Chris W

[Scott Murdaugh]

But as with all unqualified legal advice, take with a pinch of salt. Although I hope I've given you some other things to think about.

Always do... I appreciate the feedback though.

The people who own the "shares" or whatever I'd be calling them would have zero say over the day to day operations of the company...

I'd show them the plan, and they'd trust me to make it happen.

The only (if I had my way) say they would have is on deals where they want me to buy them out, or if we want to flip one of the product sites or anything like that I'd talk with them about it first.

If I did this, and again, haven't thought it through, I wouldn't be looking for IMer's for investors...

These are guys with a lot of money looking for solid investments. And that's what'd it'd be.

They pay, I do the work, they get x% of the profits indefinitely, until we agree to sell or agree to a buyout of some kind.

-Scott

[klublok]

If you are set up as a company, you can always issue a second class of shares. Usually your company articles would allow you to issue a class "B" shares where you can stipulate that the holders of those class "B" shares do not have voting rights, but entitled to dividends of the company.

You can also set the venture up as a unit trust. A unit trust operates like a company (a live example would be like an ETF) and you can also have class "B" units where the holders don't have any voting rights.

Another thing you can do is offer your investors a "deferred purchase" scheme where they put in say 10% upfront and then when the business hits (say) $100k in profits, then you can "call up" the second 10% of their purchase price (or have the profits fund their second instalment payment etc). This way their purchase price is self funding and their risks are minimized. Further this may be a better sell to your investors as they are essentially using the profits that they are getting to buy into a business.

[SageSound]

LOL! We've got people from Australia and the UK trying to explain how to set up a legal business structure in the USA!

Here's my nutshell interpretation of what you're saying. Mind you, I'm not lawyer. You could get better answers from books found at Nolo Press, or any PrePaid Legal attorney.

In America, if you're one person doing business for yourself, it's a "sole proprietorship".

If you engage other persons under contractual agreements (verbal or written), it becomes a "partnership", and the terms of the contracts set the rules, possibly subordinated to various governmental regulations.

Depending on how you write up those agreements, you could also set up a "General Partnership" or a "Limited Partnership". In absence of specific legal language one way or the other, I believe you'd have the former.

All of these convey very clearly defined and well-established legal liabilities. For example, in a General Partnership, all partners are legally liable for the actions of all other partners.

If you're cool with that, fine.

If you want a little more liability protection then you might want to consider talking to a lawyer and setting up an LLC.

FWIW, I don't think a Corporation is a good fit for the sketchy details you've provided. But a CPA or tax Lawyer can answer that much better.

HTH
-David

[Don Schenk]

Here's a weird question... Would selling "stock" or some other means of partial ownership be an unregistered security?

I came across this:

Invest FAQ: Warning: Selling Unregistered Securities

:-Don

[Scott Murdaugh]

That's exactly what I'm hoping to avoid...

I guess my best bet is to really think it through and consult with a lawyer.

Thanks for the link.

-Scott

[Jason_V]

Scott,

What you're talking about actually sounds more like venture capital.

Venture capital - Wikipedia, the free encyclopedia

As that article states most of the time the venture capitalists want to be able to direct and control the company. However, this could probably be easily overcome by a proper contract that states no such privilege exists for the investors of your company.

[klublok]

Originally Posted by SageSound

LOL! We've got people from Australia and the UK trying to explain how to set up a legal business structure in the USA!

-David

Actually, the general structures you use for a business venture is pretty much the same across most English speaking jurisdictions and even across most developed and developing world. This is because historically they all stem from the same place of origin (England).

Sure the day to day admistrative aspects and terminologies may be different - and there may be difference treatment of the structure for tax purposes, but because most businesses transact across different countries, companies and unit trusts are common and are mostly governed with simliar rules.

I am not speculating either. In my previous life I worked in mergers and acquisitions and venture capital funding in a top tier law firm, I have set up companies in Cayman Island, unit trusts hedge funds in Hong Kong and bought and sold corporations in Europe.

[Michael Taylor]

Definitely contact a business attorney. You simply have to. When you get into selling shares of a company, you're dealing in securities, and you will get busted in double quick time if the SEC gets wind of you coloring outside the lines.

Do not pass GO, do not collect $200. Do it by the book...shortcuts when dealing with securities just isn't worth the dimes you'd save.

[jacktackett]

Scott,
IANAL, but as Don has indicated anytime you get into selling parts of a business in exchange for money - you can get all tangled up in securities issues. You can run a foul of the laws in a variety of ways given there are both federal regulations and State regulations. This is something you really need to speak to a real lawyer about - or at least a CPA to get a better idea on taxes and reporting as well.

But no matter what - before you do this you really need to speak to a lawyer in your jurisdiction.

Be careful and good luck,
--Jack

[Tsnyder]

Limited Liability Limited Partnership... done.

Call an attorney for further info.

Tsnyder

[Tom Goodwin]

Disclaimer: This in no way constitutes legal advice. If, hypothetically, i was a corporate lawyer who did a lot of venture capital work for emerging companies, here might be my thoughts:

(1) If I was one investors, and the investment was sizable (obviously that depends on the person), I would definitely require some sort of company (whether corporate, llc, or partnership) to protect my investment.

(2) It really is easy to set up an corporation or LLC. As someone else recommended, you could issue a one class of securities (or "membership interests" in the case of the LLC) to you, and another class of securities to the others (without voting rights). I think this would be ideal situation. If you were only to issue one class, you would want to keep 51% (actually 50.000001%) ownership yourself to prevent control issues. You could have some sort of stockholders agreement that might allow to get away with a pure 50/50 split with a single class, but I just don't think the added headaches would be worth it. You want it to be *your* company.

These days, many situations just like yours are done in the form of LLCs with two different types of members. Members type A are what you could consider the owners, and Members type B get some sort of payout, whether it be a revshare, lumpsup upon meeting certain milestones, or what not. It really isn't that hard to draft up, hypothetically.

(3) In the U.S., the genreael rule is that you are not allowed to issue shares of stock (this would include llc interests) unless such shares are registered with the SEC. There are many exceptions, the most common ones are under Regulation D (also known as "Reg D offerings").

Reg D is composed of Rule 504, 505 and 506 exemptions. Each one has different variables. Things they look at are offering size and types of investors (whether they are "accredited investors", which basically just means they either make a lot of money each year or they have a high level of net worth).

The key were is that you are not allowed to make public solicitation or advertising to get investors. This is a big non-no by the SEC. You can chat with people etc., but don't be putting up postings, articles, etc. looking for investors. You can certainly approach people invididually. The second key item is that the investors who get the shares, are subject to these same restrictions. Assuming you don't plan on raising more than $1,000,000 USD, you would likely qualify as a Rule 504 exemption.

Note that there is a federal filing for Reg D filings, and a state filing in each state where an investor or your company is located/incorporated/formed.

If you have any specifics you can PM me.

[Tom Goodwin]

Exactly. The names of the entities might differ (like the GmbH in germany vs the LLC in the US), but there really isn't that much difference between the U.S., Western Europe and Australia. I expect there would be certain exceptons/leniances with EU countries in terms of deals with other EU countries, but i don't really know anything about that.

Originally Posted by klublok

Actually, the general structures you use for a business venture is pretty much the same across most English speaking jurisdictions and even across most developed and developing world. This is because historically they all stem from the same place of origin (England).

Sure the day to day admistrative aspects and terminologies may be different - and there may be difference treatment of the structure for tax purposes, but because most businesses transact across different countries, companies and unit trusts are common and are mostly governed with simliar rules.

I am not speculating either. In my previous life I worked in mergers and acquisitions and venture capital funding in a top tier law firm, I have set up companies in Cayman Island, unit trusts hedge funds in Hong Kong and bought and sold corporations in Europe.