Equity Partner Wants Share of LLC, Not Individual Deal?

Question

Hi BP. I've got a potential equity partner who is interested in buying a stake in my LLC instead of buying into individual deals. It would be something like a $20,000 starter investment and then an additional $20k contributed each year. I can use these funds to pay for property acquisition, marketing, rehabs, or anything else needed to keep the company growing.

Is this a dream come true or an accounting nightmare? Has anyone structured something similar? Any pitfalls to watch out for?

Jay Hinrichs · Answer

the worse decisions I ever made was allowing minor partners into my LLC's many times this leads to bruised feelings and or litigation to unwind.

now this is not a lot of dough.. so it depends on how much interest would 20k buy  IE  1% of the LLC or 50%.

Also if you are planning on any debt in the company any member with 20% or more ownership is usually required to be on the loans and PG said loans.  so a few other thoughts there.

Aaron Mikottis · Answer

All,

Thank you for your honest replies. To answer the question on how much equity would be traded, right now the discussion is talking about a 1-to-1 exchange. $20k investment in the company is worth $20k. Growth gets captured by us both.

Anyone do something similar?

@Jay Hinrichs - Thanks for your comment about minor partners. I appreciate the info on the loans as well, I did not know that!

@Bob Derwin - I have known this person for a long time - we used to live together. I agree that it is a lot of hassle for not a lot of cash right now. I believe that he is "testing the waters" so to speak. He's a strong index funder so this is outside his comfort zone. I believe that he wants me to have skin in the game until more trust is developed.

@Tom Spaeth  - thanks you for the comment. If I move forward on this I will definitely not have all of my properties in one basket.

@Andrew Johnson  - I appreciate your perspective. In my eyes, $20k could pay for a rehab, allowing me to jump on a deal I might not be able to fund. My portfolio is still small. More money = more moves. But I agree that $20k is not an enormous sum and I will still need to strap together more funds from other sources.

@Jeff B.  - Great point! I will have to structure this in a way that retains my majority share in all scenarios.

@Jeff Filali  - good point on finding a $20k loan cheaper!

Jeff Filali · Answer

Set up a new LLC partnership for doing JV deals maybe, but there's no way I'd consider selling even 1% of my company for $20K.  For $200K maybe, but even then I'd probably set up a separate LLC for the partnership.  $20K isn't going to go that far.  You can find many people willing to loan you $20K for a fair return and not expect any equity.  If you do decide to sell your soul, I mean equity, for $20K, let me know, hell I may want part of that deal.

Jeff B. · Answer

@Andrew Johnson  worse yet, what if he's punctual and contributes regularly to the point that his share becomes > 51% of the assets? - - you loose control of your entity.

Logan Allec · Answer

@Aaron Mikottis, from an accounting perspective, no, this is not a nightmare, but you will need to amend your LLC agreement if you are currently the sole owner.  Make sure you have a good attorney drafting it.

Tom Spaeth · Answer

Suppose it depends on how much equity you are giving up. $20k doesnt do much. Plus you will now have extra accounting fees for the partnership returns. You could easily make $20k on a deal and then you end up having to give your partner his share. If you are working a bunch of projects he just ends up returning a little of your money back to you.

Of course depending on your agreement I suppose you could have multiple LLC's. Some for your own work and some fore partnership work.

Sound like a shark from shark tank.

Bob Derwin · Answer

Your operating agreement should detail how this would be handled, and your CPA should be able to handle the financial side of things.  My question is, do you really want to do it?  I personally, would not go down this path. How long have you known this person?  What happens if he doesn't have the next 20K?  Seems like a lot of trouble, for a little cash.

Equity Partner Wants Share of LLC, Not Individual Deal?

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