Tell me more ×
Answers OnStartups is a question and answer site for entrepreneurs looking to start or run a new business. It's 100% free, no registration required.
up vote 1 down vote favorite

This may not be a very common question since most tech startups don't really pay dividends, but maybe someone can help me.

I want to start a lifestyle business (Maybe one day it will be sold, but it's not the goal. Definitely not IPO material). Basically I want to live off the profits.

I have a friend who wants to invest. He would be getting preferred stock, and it's my understanding that he'll have "dividend preference", which I'm not sure what it means.

For the sake of the argument let's say we each own 50% of the business (he owns preferred stock, I own common stock).

One day we get to the point that we want to split $100K a year, or a month, in dividends. How much each would get?

If we each owned common stock I assume it would be $50K each, but with preferred, how does it work? Is there a percentage (say 10%) that he gets on top of what he'd get (so $50K + 10% = $55K), then I get the rest?

Will it be like this until the end of time, or does it have a cap of some kind (like recovering how much money he put in)?

Any info on this would be really appreciated!

share|improve this question

2 Answers

up vote 1 down vote accepted

So, first of all, a "Dividend Preference" means that the preferred stock gets a dividend before the common does. There are all sorts of ways of doing this, depending on exactly what rights the preferred holder is getting. Among other things, it could mean:

(1) If you're going to give a dividend to the common, you have to give at least as much to the preferred.

(2) You can't give any dividend to the common unless you give a set amount to the preferred -- the "set amount" often being a percentage of the preferred's original investment. So, for example, the preferred holder has to get 8% of his original investment back every year before the common gets anything.

This then leads to the question of "what if there's a year that neither the common or preferred get anything. What happens the following year?" And, there are two possibilities there -- in one, it's still 8% of the original investment; in the other, the preferred also has to get the 8% for any years that were missed.

Chances are that your investor means (2).

(Note: Ignoring tax consequences. Check with your attorney about those.)

share|improve this answer
The LLC are pass-through in the US. The OP's location is Spain. I'm pretty sure in the EU LLC's are what we refer to as a Corporation in the US. – littleadv Jul 30 '12 at 19:07
Thanks -- I missed that. – Chris Fulmer Jul 30 '12 at 19:13
So basically it depends on what we agree on, but (2)'s the most common. Thanks for the detailed answer. – manuelflara Jul 30 '12 at 19:44
up vote 0 down vote

It works the way you design it to work. You go to an attorney, draft an agreement (charter) that will also rule the issue of dividends per each class of stock. Your accountant will calculate the dividends based on that charter.

There may be some local rules and regulations, but since you didn't bother mentioning your jurisdiction, we cannot tell.

share|improve this answer

Your Answer

 
discard

By posting your answer, you agree to the privacy policy and terms of service.

Not the answer you're looking for? Browse other questions tagged or ask your own question.