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Last year, we've created a partnership (LLC) and developed a software product that started bringing revenue of about $15K a month after only 11 months of development. One of the partners is an investor who put about $250K and doesn't want to invest into a further product development, which we can bring to a different level should we had another $1M of investment capital.

Is there any way to replace our investor with another one? The partnership agreement states that any decision about the company has to be made unanimously by the board of directors, and he is one of them. He has a substantial amount of shares and bringing additional investor may not make much financial sense.

Anyone has experience with buying out an investor?

Thanks

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5 Answers

up vote 4 down vote

If your investor doesn't listen, you may end up having to leave this partnership and start a new company that builds upon the same successful business model.

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1+ but lets hope that doesn't happen. – BhargavPatel Aug 19 '10 at 13:40
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This is not going to work - he'll keep this current software, and if we'll create a similar software in a new company, he can sue us for violation of the non-compete clause. – Yakov Fain Aug 19 '10 at 21:54
How long is your stated non-compete clause? Does it not end when your contract terminates (when is that?)? Did you "permanently" consign yourself to non-competition? – Henry the Hengineer Aug 19 '10 at 22:05
This doesn't make sense. You can't simply leave the business and take the business assets with you. You have to buy him out. – David Mar 24 '11 at 14:07
Nobody said anything about taking the business assets to the new company. Buying him out is an option, but so is starting a new business with similar software via another investor - do what Bill Gates did to Apple. It may be very simple since the IP probably isn't patented at this stage. Just create software with the same end-function using a different framework if possible. Of course, whether this is viable depends on the terms of his non-compete clause and/or the price of his investor. – Henry the Hengineer Mar 24 '11 at 15:40
up vote 2 down vote

You don't have much choice here since you have a unanimous clause in your LLC operating agreement.

The best way to go about this is to ask what he wants to allow more investment. You have to lay out the case for why taking on more investment will give him a greater return than what's occurring now.

Most investors want an exit and if he gets that, he might be just fine with walking away.

I would also carefully read the operating agreement and figure out what decisions you can and cannot make without other owners. Usually, the day to day operations are left to a manager but your structure may not be that.

If your investor is a non-operating one, you can always stop operating the company and see how they react. This will show that it's a true partnership and that you both need each other to succeed. This would be the last alternative since that will crater both of you.

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up vote 1 down vote

A few comments:

any decision about the company has to be made unanimously by the board of directors

Seems a bit overkill. I hope that is qualified with something more significant than just any decision.

Your LLC has a Board of Directors?

If I were in your shoes I would ask the investor what he/she wants out of the deal. New investors might be very willing to buy him/her out or there may be a way to convert to a C corp and then value the company in such a way as to make the new investors and the current one happy.

Other options include taking a loan out. The bottom line is that you have to talk to this investor and see what they want out of it.

Let us know what you end up doing.

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up vote 0 down vote

I am sure people will help you out here but I suggest you talk to a lawyer. They might give information that is not accurate for where you live. Even though they mean well! Talking to a lawyer is the best thing to do.

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The layer who created the original partnership agreement offered nothing but trying to convince an investor to step out or bring an additional one. – Yakov Fain Aug 19 '10 at 0:12
up vote 0 down vote

He is a partner. You need to talk with him and see what direction he wants to head. If he wants to stay at the current level and won't budge you may be out of luck. A sweet enough offer should entice him.

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