New LLC share distribution: how to divide properly?

[gogga]

Hello,

We have started a new LLC consisting of 4 partners, including myself.
We all have agreed to share the company management and ownership
equally (25% each).

I registered the company through incfile.com and used the option of
getting their business kit which, among other things, includes actual
blank shares. There are 20 blanks.

The company is now actively looking for a CEO whom we are hoping to
attract with equity (~3-7%). Once CEO is on board, his first task would
be to negotiate a licensing agreement with the university (we need that
patent for development of our product). University would want either
cash, which we don't have, or equity in exchange for an exclusive
license. The university is known for going for about 5-15% ownership in
exchange for the license.

So here I am now, trying to figure out what to do with the blank
shares. I can give out 4 shares, 25% each. But what would I do once we
get a CEO? Delete those shares and issue new ones where CEO gets 5% and
we all get a quarter of 95%? Then do the same thing again once we
negotiate a license agreement? I will quickly run out of blanks this
way. Also, is it a common practice to request owners to return their
shares so I can re-issue new ones?

Any advice would be highly appreciated!

Thank you,

Greg

[Mark T.B. Carroll]

Post by gogga
We have started a new LLC consisting of 4 partners, including myself.
We all have agreed to share the company management and ownership
equally (25% each).

Okay.

Post by gogga
I registered the company through incfile.com and used the option of
getting their business kit which, among other things, includes actual
blank shares. There are 20 blanks.

(LLCs have units, not shares.) Er, so how many units actually exist?
There are only 20 units in total? Do you have an Operating Agreement?
What does it say about this sort of thing?

The usual C-Corp thing to do would be to have maybe a million shares or
whatever (well, a lot, anyway (-:) and divide some up among the founders
but leave the rest unowned, in anticipation of dilution, and to give the
rest to people over a couple of rounds of dilution.

LLCs are rather more flexible, though. Perhaps you can make new units
appear out of thin air or something. It'll all depend on what your
Operating Agreement says or, failing that, the default terms that your
state's LLC law stipulates.

Post by gogga
The company is now actively looking for a CEO whom we are hoping to
attract with equity (~3-7%). Once CEO is on board, his first task would
be to negotiate a licensing agreement with the university (we need that
patent for development of our product). University would want either

A good business lawyer should be able to do most of that. The CEO's
value might be more in convincing the university that you have a
half-credible management team.

Taking on this CEO shouldn't be something you just jump into, though. An
equity-holding CEO is an intimate part of a business. Just as with
marriage, you start off with some dates, then family visits, etc. first,
to make sure you're not going to have big regrets. Or, you at least make
them easy to get rid of, but that's hard to talk them into if you can't
afford to pay much right away, because they'd not open themselves to
being paid cheap then ditched.

Post by gogga
cash, which we don't have, or equity in exchange for an exclusive
license. The university is known for going for about 5-15% ownership in
exchange for the license.

How flexible is it? Cash could be convertible debt paid down by payments
to the university of a royalty on net sales, or something. Who'll be
paying to defend this patent? Do they want reimbursing for the filing
costs? If you can delay them getting equity (probably through an option
they exercise when VC investment comes, or something, if they're fans of
the traditional business growth model) then they don't have pass-through
profits to get taxed on in the meantime, and the business may be worth
much more at the time it's decided what fraction they get so they may
get a smaller fraction and they've been out of people's way in the
meantime. Similarly, you can promise them cash, but in circumstances
when you can actually afford it - i.e. not a large chunk of gross
revenues while you're tiny and unprofitable.

Post by gogga
So here I am now, trying to figure out what to do with the blank
shares. I can give out 4 shares, 25% each. But what would I do once we
get a CEO? Delete those shares and issue new ones where CEO gets 5% and
we all get a quarter of 95%? Then do the same thing again once we
negotiate a license agreement? I will quickly run out of blanks this
way. Also, is it a common practice to request owners to return their
shares so I can re-issue new ones?

(snip)

I've never heard of a "returning shares" procedure that was usual for
this sort of dilution process. It's more usual to think in advance of
what % you intend to end up with, and start out owning that fraction of
the total of both issued and unissued shares, then issuing unissued
shares as you go along. But with LLCs giving more flexibility about
quite how membership units work, maybe you can do weirder magic,
especially if it doesn't scare investors off.

This is a manager-managed LLC instead of a member-managed one, right?
So, that makes it easier to give "non-voting equity" I suppose.

-- Mark

[SD]

Post by gogga
Hello,
We have started a new LLC consisting of 4 partners, including myself.
We all have agreed to share the company management and ownership
equally (25% each).
I registered the company through incfile.com and used the option of
getting their business kit which, among other things, includes actual
blank shares. There are 20 blanks.
The company is now actively looking for a CEO whom we are hoping to
attract with equity (~3-7%). Once CEO is on board, his first task would
be to negotiate a licensing agreement with the university (we need that
patent for development of our product). University would want either
cash, which we don't have, or equity in exchange for an exclusive
license. The university is known for going for about 5-15% ownership in
exchange for the license.
So here I am now, trying to figure out what to do with the blank
shares. I can give out 4 shares, 25% each. But what would I do once we
get a CEO? Delete those shares and issue new ones where CEO gets 5% and
we all get a quarter of 95%? Then do the same thing again once we
negotiate a license agreement? I will quickly run out of blanks this
way. Also, is it a common practice to request owners to return their
shares so I can re-issue new ones?
Any advice would be highly appreciated!
Thank you,
Greg

You issue more shares after the current shareholders have approved a new
release.

[John A. Weeks III]

Post by gogga
Also, is it a common practice to request owners to return their
shares so I can re-issue new ones?

Yes. It is called a "stock split". You most often see it
with rapidly growing companies where they will split 2 new
shared for each old share. 3 for 2 and 4 for 3 are also
somewhat common. It also works the other way with a reverse
split. That is often done when new investors come on board.
The new investors might get new shares, while the existing
investors are reverse split 1 new share for 10 old shares.

-john-

[Mark T.B. Carroll]

"John A. Weeks III" <***@johnweeks.com> writes:
(snip)

Post by John A. Weeks III
Yes. It is called a "stock split".

(snip)

Thanks for correcting me. I hadn't thought deeply about how stock splits
actually work, but your explanation makes perfect sense.

-- Mark