How do I limit the payout amount to an equity partner?
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How do I limit the payout amount to an equity partner?
If I receive a small amount of work in return for equity, is there a way to put a limit on how much that person can be paid in the future, or do I have to keep paying them forever? I know there’s a way to essentially buy back shares, however I would like to avoid a forced buy pack option. I would rather have some terms up front concerning what limitation a can place on future payouts if I feel that the work is too small or that this person will not stay with my company for the long run. How do I limit the amount
they can make from the equity or just place an option to buy back the shares without having to negotiate with them?
Asked on December 28, 2016 under Business Law, Florida
Answers:
SJZ, Member, New York Bar / FreeAdvice Contributing Attorney
Answered 7 years ago | Contributor
You can't limit what an equity partner receives from the sale of the business: i.e. if/when you sell it (or close it down and liquidate any assets and distribute any proceeds and money remaining in the bank account, etc.) they get a share proportionate to their ownership interest.
Howeer, you do not need to pay them reqular distributions IF you have an LLC and the operating agreement states that they do not receive distributions (or alternately, puts a cap on what they can receive)--that's because the LLC structure gives you considerable flexibility in ownership, in payments, etc. It just has to be in writing, in the operating agreement or a written amendment thereto.
If it's a corporation, then anytime there is a dividend, you have to give them their share--you cannot exclude or limit it, as with an LLC.
You can have a mandatory buyback. Overall, though, you are better off not giving them a piece of your business unless you expect the business to likely fail, in which case it does not matter. If you expect or hope to succeed, why give them ownership with all its complications and a piece or at least potential piece of the action for "a small amount" of work? Just pay them a wage or fee for their work.
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