Hi all,
I'm entering into a company partnership, but I am relatively new to the investing/raising capital world so I want to make sure I understand the incentives/risks. I have done my own research and have spoken with the partners for the past week but I still am confused on one part of the contract. I have provided some details below and my specific questions are at the bottom. Thanks so much!
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***specific %, $, etc. have been changed, as the goal is for me to understand the terminology without giving any specific details.
FOR REFERENCE:
Company A = company we are acquiring
Company B = our company
"The (COMPANY A), Inc final acquisition close is still pending. Assuming (COMPANY A), Inc.’s Common shareholders all trade their shares for (COMPANY B ), LLC Units, assuming a $XXXM raise for (COMPANY B ), LLC, and option pool allocation of approximately XXX% post-money on top of (COMPANY B ), LLC’s existing XXX% option pool after PARTNER equity assignment, PARTNER will be assigned approximately the following Units
THE TOTAL ISSUANCE OF 3,500 P-SERIES UNITS MAY VARY UP OR DOWN DEPENDENT ON THE ABOVE ACTIVITIES AND WILL BE ADJUSTED TO MAKE SURE THE PARTNER RECEIVES AT LEAST 1.00% ON A FULLY DILUTED BASIS:
__1.00___% (3,500 Units) of Capital Proceeds on a fully diluted equity basis at P-Series Fair Market Valuation (FMV) approximately $8,200,000 (EIGHT MILLION TWO HUNDRED THOUSAND DOLLARS) on a vesting schedule
__1.00___% (3,500 Units) of Net Cash Flows as defined in the Operating Agreement.
The above percentages translate into the following P-Series units
A total of approximately _3,500_____ P-Series Units - starts on the Effective Date with a __3__ month cliff vesting monthly at a rate of _97___ Units Months 1 through 35 and _105_ Units on Month 36.
The PARTNER agrees to be bound by the Operating Agreement in its entirety and therefore will subsequently sign into the Operating Agreement ( I WILL PROVIDE PARTS OF THE OPERATING AGREEMENT BELOW THAT THE ABOVE ADDRESSES)
The percentages are general percentages based on the outstanding on the number of outstanding Units calculated on a fully-diluted basis of all outstanding and convertible or issuable securities as of the Effective Date."
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SECTIONS OF OPERATING AGREEMENT that correlate to the above
(a) Distributions of Net Cash Flow. After providing for any reserves that it may deem appropriate, the Board may make distributions of Net Cash Flow to the Members, with the frequency determined by the Board, as follows:
(i) first, to all applicable Members, such Member’s Tax Distributions in accordance with Section 7.1(d);
(ii) second, to the holders of Series A-1 Units, pro rata in proportion to the number of such Units held by each holder, until such holders have received distributions under this Section 7.1(b)(ii) in an amount equal to the aggregate Priority Return on all Series A-1 Units outstanding immediately prior to such distribution;
(iii) third, (A) eighty percent (80%) to the holders of Preferred Units pro rata in proportion to the number of such Units held by each holder, until each such holder receives a return of its Capital Contribution and (B) twenty percent (20%) to the holders of Common Units (including, subject to the limitations set forth in Section 2.7, Common Units issued as P-Series of profits interests), pro rata in proportion to the number of such Units held by each holder; and
(iv) finally, (A) twenty percent (20%) to the holders of Preferred Units pro rata in proportion to the number of such Units held by each holder, and (B) eighty percent (80%) to all holders of Common Units (including, subject to the limitations set forth in Section 2.7, Common Units issued as P-Series of profits interests), pro rata in proportion to the number of such Units held by each holder.
(b) Distributions of Capital Proceeds. Capital Proceeds shall be distributed to the Members within a reasonable time following the Capital Transaction to which the Capital Proceeds relate in accordance with the following order of priority:
(i) first, to all applicable Members, such Member’s Tax Distributions in accordance with Section 7.1(d);
(ii) second, the holders of Preferred Units, pro rata in proportion to the number of such Units held by each holder, until each such holder receives its unpaid Priority Return (if any) and a return of its Capital Contribution; and
(iii) finally, to the holders of Preferred Units and to all holders of Common (including, subject to the limitations set forth in Section 2.7, Common Units issued as P-Series of profits interests), pro rata in proportion to the number of such Units held by each holder.
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- "__1.00___% (3,500 Units) of Capital Proceeds on a fully diluted equity basis at P-Series Fair Market Valuation (FMV) approximately $8,200,000 (EIGHT MILLION TWO HUNDRED THOUSAND DOLLARS) on a vesting schedule" -> can someone dissect this for me?
- _1.00___% (3,500 Units) of Net Cash Flows as defined in the Operating Agreement. -> can someone dissect this also?
- I' assuming that capital proceeds and net cash flows I usually won't see until the end of a fiscal year correct?
- Anything else here big I'm missing? I have a clear understanding of my risks, basic duties etc...I just don't understand this entire section very clearly
Also want to mention I am getting a salary on top of this in case that is relevant!
edit: I am NOT asking for legal advice! I'm just trying to understand general terminology of the above. Thanks.
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