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I am a cofounder of an LLC, together with two other people and we all have equal ownership stakes at 33%. It looks like I will take a job with a more established company and will need to end my involvement with our LLC. What I am wondering is what does usually happen with my stake in the company if I leave. What are the different options/routes that we can take?

Thanks for your input

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migrated from stackoverflow.com Mar 21 '11 at 22:10

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You'll likely get much better answers here: answers.onstartups.com –  David Mar 21 '11 at 22:10

5 Answers 5

That is the kind of question that should have been addressed in the founding documents of the company. Since you're asking, I'll assume it was not.

The legal answer will depend on the legal jurisdiction you are in. However, answering this question through the courts can be a very expensive proposition.

I suggest that you instead think about how much value you have created to date, approach the two remaining parties, explain your need to leave, and ask if they would be willing to buy out your share of the company. If they are not in a position to pay a cash buyout, suggest that the buyout be paid out of a share of future profits. I would not insist on maintaining ownership if I'm not going to contribute, even if I had the legal right to do so. Making the others 50/50 partners motivates them more to make the business succeed, increasing the chance that you will see some return on your investment to date.

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Good identification of the need for this to have been identified in the founding docuement. I am constantly amazing at how the "end of the agreement" is never identified in the beginning of it. –  Joseph Barisonzi Mar 21 '11 at 22:38

Yes, there are three options:

  1. Cash Out
  2. Earn Out
  3. Walk Away

Cash out Be paid 1/3 of the value of the company right now. That is paid either from the cash reserves of the company -- or through an equity infusion of the other two owners. Basically they put more money in to buy your shares. Often the other owners will borrow money directly, or guarantee a loan on behalf of the company to support this cash out.

Earn Out Be paid 1/3 of the value of the company over the next X periods. It is usually a set amount, a percentage of revenue, a percentage of gross margin revenue, a percentage of profit or some combination thereof. The LLC sends you a check every month or every quarter until the balance is paid.

In both of these two models you need to agree amicable on the value of the company and divide by thirds. Or you need to agree to hire an appraiser who does that for you.

Walk Away It sounds like you are moving on to a new path. Perhaps this dream did not materialize the way you had hoped. Maybe it isn't growing the way you had dreamed. Sometimes we need to just accept that what could have been wasn't and walk away. The cost of figuring out who pays what to who is just not worth it.

I am going to make an assumption. Well two:

  1. You like your partners. You spent a lot of time with them. And you consider them friends.
  2. You want them to be successful in their endeavor even if you are not there.

If these two assumptions are true then I strongly recommend you to ensure that there is no ongoing financial tie. Have the end of your participation be the end of you participation. I also would recommended that you strongly consider what the costs to the relationship will be if the LLC has to take a percentage of hard earned cash every month and send it to a

Sometime the right decision moving forward is not the one that maximized personal financial gain.

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Thanks for the prompt feedback.

Currently the business is not profitable, so buyout is not on the table, but your suggestion is definitely an option.

Here's a few avenues that we've been exploring:

(a) give up a significant part of the ownership (basically for nothing)

(b) dilute my share through time down to certain fixed percentage

Option (a) doesn't make a lot of sense since I've contributed significantly to the company. Option (b) sounds better, but it still feels like I would be giving part of my share for 'nothing'. Perhaps a combination of (b) and your suggestion (share of future profits) would work well. Or perhaps other avenues?

Regarding (b) I'd be great to hear some thoughts on how the fixed percentage could be determined and what would be a reasonable value.

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You can just write comments here to talk to someone ... tow variables to play with 1. what is the company likely to be worth in 2 years. 2. How much effort have you put in (put a value on it) –  Robin Vessey Mar 21 '11 at 22:45
    
Ooops -- didn't see this until after I posted below. Sorry about that. I know it is going to be very very hard to hear but extracting value from a non-profitable startup is going to be very difficult. The resulting model of earn out will have hard earned money generated in the future paying you back for "jumping ship" and will not be experienced by the other partners well. In no disrespect for your hard work and sweat and tears up to now -- I hope you are able to make the right choice for all involved! –  Joseph Barisonzi Mar 21 '11 at 23:04

By default, you own the shares and like a car even if you don't drive it you still own them.

The polite thing to do is offer your shares to them as "first right of refusal" ... at an agreed price. Maybe a payout over X months or something as they are probably cash strapped at the moment.

If the company hasn't hit profitability and your leaving because it isn't going to soon then you can simply hand them back as a good will gesture.

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JBarisonzi: great input, thanks.

Your assumptions are correct. We are friends and I would definitely like them to succeed. However, I think it is also fair that an agreement be such that recognizes contributions that everyone made on a path to possible success.

For instance, giving up my share would essentially mean that if the company gets bought by another company (certainly a possibility even if not a big one) one month after I leave I would get nothing. My option (b) was constructed to protect against that scenario.

I realize there is a need to have some percentage of ownership to incentivize other potential partners/employees - I am just wandering what is the best way to solve this problem. So that it's fair and everyone's happy :-)

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Well, how about you snap shot the value today. Divide by three. Convert the resulting ownership equity to debt. You hold the note. The terms of the note are that you get paid on a percentage of profit with payment differed until the amount owed is 10% of the note. Have a clause that allows you to forgive the note if you wish. (Needs to have a forgiveness clause triggered by unsustained profitability within x time as well.) This allows your contribution to be recognized if the company becomes profitable shortly after you leave and doesn't put a cash drain on the start up. –  Joseph Barisonzi Mar 21 '11 at 23:56

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