LLC or Corporation for angel investors

haamoniismoothhaamoniismooth Posts: 1subscriber
edited August 2006 in Startup Funding
Is it better to have a LLC or a corporation when seeking seed capital from individual angel investors? What are the pros and cons of each?

Comments

  • rocknroll333rocknroll333 Posts: 2subscriber
    According to my lawyer an LLC is better because you can have different class of stock. When you are ready to negotiate the operating agreement with your angel investor you have more options.  Forming a regular corporation only allows 1 class of stock putting everyone on the same playing field so to speak. With an LLC you can limit the control the investor has by selling a different class of stock.
    Be sure to check out todays show, I gave a killer elevator pitch!
    p.s. Vote for me "Rocknroll333" Im a finalist in the southwest airliines vacation contest.
  • haamoniismoothhaamoniismooth Posts: 1subscriber
    Thank you Rocknroll333! I really appreciate your help. Congratulations on your pitch! I`m looking forward to hearing it. Ironically, I also did an elevator pitch too. It was a lot of fun and a great learning experience in preparing for and making the pitch. Have a great weekend. Thank you again.
  • rocknroll333rocknroll333 Posts: 2subscriber
    Your very welcome! rocknroll3332007-1-14 0:2:53
  • haamoniismoothhaamoniismooth Posts: 1subscriber
    That`s great you got on this week! Great. I`ll check out the transcript. Cool site by the way. Kampai,James
  • rocknroll333rocknroll333 Posts: 2subscriber
  • robertjrobertj Tampa Bay, FloridaPosts: 0subscriber Member
    The "single class of stock" restriction applies to "S" corp structure. The C corp structure can have m,ultiple classes of stock as defined in the articles of incorporation.
    Unless you have some special circumstances, I would suggest creating the operating agreement before engaging with investors.
     
    Robert Johnson
     
  • rocknroll333rocknroll333 Posts: 2subscriber
    It depends on what you are looking to do with your corporation. We chose on the advice of our lawyer a LLC to prevent double taxation that you can get when you sell shares of a C corp. Here is a link that compares C corp to LLC.
    http://www.laughlinusa.com/llcvscorp.asp</A>
    As a business person depending on your business plan an its exit strategy is what you should use to determine what type of corporation you need to set up.
  • SunnySunny Posts: 0subscriber
    hi.. i just want to know that how much should you be prepared to offer your stakes to your investor while seeking seed funding from him....  thank you...
  • rocknroll333rocknroll333 Posts: 2subscriber
    The percentage an investor takes depends on the valuation of your company. The more assets you bring to the table, the less percent you need to offer.
    I have always been told be prepared to give up half the company or more depending on how much you bring to the negotiating table.
    However one of my businesses has ended up with investors offering to get only 10%.
    Many deals have conditions in them that when investor wants to sell they offer the shares to you first. So you have option to buy back your business stock.
     
  • haamoniismoothhaamoniismooth Posts: 1subscriber
    thank you everyone for the suggestions and guidance. this is very much appreciated! thank you  i`m going to meet with a lawyer soon and if i find out anything different than what has been posted here, i will update 
  • GilGil Posts: 0subscriber
    As a lawyer for technology startups I have formed hundreds of entities, and in nearly all cases would recommend a California or Delaware corporation, and strongly discourage anyone from using an LLC.  I would question the wisdom and experience of anyone who says otherwise.  Avoiding double taxation, for example, is the last thing most startups have to worry about.
    There are many reasons to favor a corpaoration but the main ones include:
        (1) Having a well-known, easy to understand corporate structure so that investors know what they are buying (most funds refuse to invest in an LLC).
        (2) Company and investors spend far less in legal and accounting fees.
        (3) Reducing risks inherent in LLC operating agreements and in LLC governance.
        (4) Ability to create stock option plans.
        (5) Creating tiered classes of preferred stock for future investment rounds is more straightforward in a corporation than an LLC.
        (6) Complexity and sometimes dire tax consequences involved in converting the LLC to a corporation down the road (which is almost inevitable), or being acquired by a corporation.
        (7) Following established business norms for the industry rather than going against the trend is a sign of willingness to play by the rules, and also knowing what you`re doing.  Same reason you wear dress shoes rather than sneakers when meeting an investor for the first time.
    Every situation is unique and there are sometimes situations where an LLC works.  For holding companies, partnership-like enterprises, family businesses that are not expected to grow, financial instruments, etc., LLCs are often preferred.  However, as a startup company you want to iron out the unique details and be as generic as you can in your corporate setup so that you are attractive to investors and prepared for rapid, trouble-free growth rather than increasing structural complexity.
    For similar reasons you don`t want to put nonstandard terms (like a right of redemption or a right of first refusal in favor of the company) into your investment contract.  There is a long list of stock terms that are common to startup investments, but a $1M investment does not necessarily buy the investor a right to preferred stock or all these terms, particularly if you are expecting larger rounds later.  That is on the low side.
    All of this assumes you are following a standard start-up model, i.e. an angel round followed by larger preferred VC or institutional investment rounds, taking on a growing number of principals and workers who will receive equity compensation, company geared to retaining earnings and reaching a liquidity event as opposed to long term cash dividends. 
    Hope this helps.
  • haamoniismoothhaamoniismooth Posts: 1subscriber
    Hi Gil, This is amazing advice! Thank you very much. I see you`re in San Francisco. I`d love to share with you some Haamonii Smooth ultra premium shochu if you`re interested. Feel free to contact me if you are.Thank you again. I`m evaluating all the information I have and your help will be a key factor in my decision.
  • nlimahs70nlimahs70 Posts: 0subscriber
    Hi Robert,
    You wrote "Unless you have some special circumstances, I would suggest creating the operating agreement before engaging with investors."What is an "operating agreement"?Thanks. Noel L. Lim
  • robertjrobertj Tampa Bay, FloridaPosts: 0subscriber Member
    Noel,
     
    An Operating agreement is the document that describes how an LLC will "operate". They are somewhat similar to by-laws for a corporation, but they are more significant.
     
    If you have a specific question or want to discuss your situation in confidence, send me a PM or contact me directly using [email protected]
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