For a refreshing change of pace from drinking and speeding tickets:

I was reviewing a contract regarding payment for some professional services work where it includes both a fixed amount up front as well as future revenue sharing. The revenue sharing portion is outlined as follows:

a). acquiring an option for 50% of the available ownership of _______ LLC. This ownership shall be equal to PARTY B at all times and shall reflect dilution of ownership that occurs as consideration provided to 3rd parties for the development of the product.

1.) Such option is executable at any time at the discretion of PARTY A and is non-transferable.
2.) Upon request PARTY B will apprise PARTY A to the value of the option in terms of the percentage of total ownership before and after dilution occurring as consideration to 3rd parties.
3.) PARTY B will inform PARTY A of any change in the overall percentage ownership stake as a result of further dilution or other capital infusions.

I think an LLC was setup to separate the Joint Venture described in the remainder of the document from its parent companies for liability purposes. Either way, does the above text look kosher to you? I was told the intent was to allow for 50% revenue sharing down the road, even if the project sells. Is that your interpretation as well?

Thanks, feel free to send me a bill

[Edited on March 3, 2008 at 8:39 PM. Reason : .]

3/3/2008 8:38:00 PM

words

3/5/2008 9:23:07 AM

Worst thread ever.

3/5/2008 10:15:39 AM

Wat?

3/5/2008 5:26:27 PM

Just looking to see if any law-type alumns would mind looking over this tiny piece!

3/6/2008 9:49:39 AM

You honestly trust your future with someone who posts on TWW???

3/6/2008 10:28:06 AM

yo i hired james crouch the other day...i think he got cheaper...only 300 dollar bucks now

3/6/2008 10:30:52 AM

I would go see a licensed attorney. There are potential issues that they will want to know a little more about before making a decision. It should not be too expensive and potentially could save a good portion in the long run.




[Edited on March 6, 2008 at 2:28 PM. Reason : k]

3/6/2008 2:27:59 PM

I'm NOT a lawyer...but I do own a company that deals with LLC formation and acquisition of capital for LLC's, so I'm pretty familiar with things of this nature. I'm not giving you any advice here, and I strongly urge you to have a lawyer review ANY contract such as this (in its entirety) before entering into agreement, but I will try to explain some things to you about the concept in the text that you posted.

Anyway...

Is the text that you posted kosher?
Short answer: Yes.
Long answer: It depends on what your expectations are.

Based upon the language in the first section, I'm guessing that PARTY B currently holds 100% ownership in the LLC. So at this point in time, PARTY B is giving you (PARTY A) a 50% stake in the corporation. The three sub-points are designed to inform you that if more parties are given an ownership stake in the LLC, your percentage of ownership will decrease (but will always remain equal to PARTY B's percentage of ownership). So, for example, if PARTY C comes along and makes an investment in this corporation, both PARTY A and PARTY B will have their percentage of ownership decreased on a pro rata basis.

----
Example:

PARTY A and PARTY B both have a 50% ownership stake in ABC LLC. So the ownership breakdown looks like this:

PARTY A: 50%
PARTY B: 50%

PARTY C comes along and makes a capital investment in ABC LLC in exchange for a 20% ownership stake. The ownership stakes are now recomputed on a pro rata basis, and would look like this:

PARTY A: 40%
PARTY B: 40%
PARTY C: 20%
----

Back to your issue now.

Your ownership share will always be the same as PARTY A's, but you might not always have an overall 50% stake in the company (and thus you will no longer have 50% revenue sharing if your overall stake decreases -- it will be equal to the diluted percentage of ownership...ie: 40% in the example above). This is why I've said that the kosherness of the text is contingent on what your personal expectations are.

In a perfect world, if ownership dilution occurred, you'd be giving up a percentage of your ownership in return for an investment that would lead to an increase in revenue and the overall value of the corporation -- so in the long run your diluted ownership stake would be worth more than the undiluted stake. But the reality is that there certainly are circumstances under which your diluted stake would be worth less than your undiluted stake.

I'm not advising you one way or another on this, but the concept in your posted text is a standard way of dealing with potential future ownership dilution in an LLC. The language is kosher, but you should only accept it so long as it meets your expectations and satisfies your comfort level.

If you have any questions, feel free to PM me.

3/10/2008 1:06:09 AM