Changes to Ownership in LLC


October 14th, 2017

Assume the following LLC:

  • Three members with ownership of 20/40/40
  • I'm the 20%
  • The other two owners are officers. I'm not

I wanted to understand how a couple of scenarios might work:

First scenario: The officers want to add member and give that person an ownership share. Does dilution have to be equal? Can I refuse? How that play out?

Second scenario: The officers decide to take outside investment. Would that in practice always mean converting to a corp. If so, dilution is equal. Again, do I have any leverage.

The reason I want to know is that the amount of effort of the members, while it might equal out to the ownership share in the long run, it's not like that now.

David M

October 15th, 2017

Look at your contracts. After that there is no right answer other than to communicate where your concerns are to your partners. I always tell people to have an anti-dilution clause. There is a great scene in the facebook movie that addresses this situation....the COO I believe it was...did not have one, and when the major investors come in he essentially loses most of his position. Of course he then sued and settled for some amount. Another thought...you can always sell your shares and exit the company. Eitherway...you have a communication issue as you are seeking advice from a forum of strangers rather than discussing with your partners or your lawyer. Never a good sign. Good luck.

Bingo Zhou CoFounder@Snoop Tech, CTO@AngelsGlobal

Last updated on October 18th, 2017

Since the decision making policy in your LLC is not disclosed, the key here is whether or not you are decision maker and what your decision weight is (e.g. board director in C-corp). Assuming you are and three of your have equal weight:

First scenario:

Dilution should be equal. Different percentage of your shares vs. the other two's is based on individual contributions or any other factors you three consented before. But percentage shouldn't affect equal dilution.

Second scenario:

If you are tech company and will have external investment, it preferable to incorporate it as C-corp in which there are no real owners but voting power. The board consent policy for every decision ensures the individual power is not abused. And vesting protocols in C-corp will protect company from cofounder separation who might take away many shares otherwise in other format of companies.

Daniele Cesano Sustainability Entrepreneur

October 15th, 2017

First scenario: The officers want to add member Etc...

That depends on the way in which you have negotiated your deal. If you were the company's owner and gave away 80%, then AT LEAST you should negotiate unanimity on key sensitive issues or negotiate some sort of voting mechanisn that does not take away 100% of the control.

If it is a new LLC and you started together, then u r in a tuffer position. Generally dilution is proportional.

Second case: not sure I ve got it

Dane Madsen Organizational and Operational Strategy Consultant

October 17th, 2017

Anything can be negotiated. The formula for ownership is what ever you all agree upon. You have leverage to the extent you can control your own involvement. If your partners sense, or know, you are a flight risk if the ownership is not more level, then they may react. If they do not seem upset enough to address this, then you may have another issue to manage. As far as outside investment, you are not required to convert to a C corp, although professional investors largely prefer it. You can create a Preferred class of shares in an LLC as well as an "option-like" EOP. Angels like LLCs for the pass through of tax losses. Again, dilution is subject to how you and your partners negotiate the deal, not set in some required formula. You should get this discussed with your partners now and not wait for it to be a deal -killer at term sheet time.