Legal structures · Legal agreements

How can we structure a going business to protect owner, and bring in new partners and investors?

Robert Stoeber Co-founder at Workglue

March 10th, 2016

Over the past eight years I have been working on-and-off as a tech consultant for a company I'd describe as a family-owned business. The company has grown organically to about $3 million/year in revenue, it's profitable, and likely could keep growing at 10% - 20% per year. It's not a tech company (they sell physical products and service those products) so they never needed full time programmers or IT staff, but online systems for e-commerce, customer engagement/support, order management, inventory control, etc. have been critical to profitable growth. My role has been to build and manage the online services.

The owner has now decided that his infrastructure is robust enough to support significant expansion. I know the industry, competition, customers and our own capabilities well enough to agree with him that huge growth is possible, but it will require a multi-million dollar investment (not necessarily all at once) in a national sales and marketing effort. So, now he's offered me a slice of equity to oversee the technology part of the company and help secure funding for this expansion.

It all sounds great, the pitch deck is solid (I think) and we are researching potential investors to approach within weeks, but here's my problem. The owner wants to keep his "original" business separate from the new company. In other words, we would form a new company (possibly under a new brand identity) that would be the "national" version of the old regional company. For the most part, the new company would be a sales agent for the products/services of the parent company. The new investment would go into the new company and key team members would receive equity in that new company. Would this kind of structure make sense to potential investors? How would investors view a situation where past customer relationships, revenue streams, intellectual property, etc. are owned by a different company? How are the equity partners in the new company protected from actions in the "parent" company?

It doesn't seem particularly unusual for different companies with separate, but overlapping ownership/management to be responsible for R&D, manufacturing, sales and marketing. But I'm having a hard time understanding how this would get set up in the first place - that is, how the interests of each party are protected, and how the legal structures would be organized.

Any advice appreciated, especially pointers to companies that have a structure I could use as a model.

Irwin Stein Very experienced (40 years) corporate,securities and real estate attorney.

March 10th, 2016

Nothing particularly unusual about this especially if the product will have a new brand. The owner is trying to protect what he has. Everything that overlaps, employees, plant and equipment, patents, etc. can be the subject of different kinds of agreements that spell out exactly which company is doing what and how they are being compensated for it. There are probably unique tax considerations so there is no one right answer.  The structure will not turn off new investors per se but the details need to be worked out.

Liza Taylor Communication Specialist at Keyideas Infotech

March 13th, 2016

Great question Robert StoeberSince it's going to be a new entity together, the investors needs to be aware of the products that would be sold through this new entity. If the owner has clearly mentioned before the investors, that the new entity would be selling his or her products only, then it's fit to go ahead; everyone's interest would be protected. As you are aware, very few investors would be interested in investing in a monopolistic environment especially if the products aren't competitive in the market. At the end of the day, they need the ROI. The best option for your scenario, is that don't look for external funding because you would be dealing with in-house products. Give a major stake to the owner and equal equity to the members of the new company. 
Good Luck...