By James T. Stimler, Esq.
Many times during the evolution of a new business towards its final, signed ownership formation documents, such as an LLC Operating Agreement, essential business decisions will be proposed and debated by the formation participants. To best clarify the parties’ agreements regarding the developing business structure and operations:
1. Timely and frequently document proposals and decisions: Whether you use emails or minutes, it is important to be prompt and consistent in recording important decisions, like capital contributions and ownership percentages. Caution: Be careful to note when a position is only a proposal to keep it from becoming prematurely locked into “the deal” documents as a decision.
2. Be conscious of legal costs: Using Letters of Intent (LOI) or Subscription Agreements (SA) will feel more businesslike, but be sure the legal services costs are within the overall legal services budget. Consider using a series of redrafts to develop the final deal documents, e.g. instead of an LOI or SA. Caution: If confidentiality and non-compete issues are crucial, get a signed commitment regarding confidentiality/ non-compete issues upfront before disclosing information.
3. Identify the “legal” client: Have a clear, documented understanding of who the “client” is which has attorney representation to avoid hard feelings later on about provisions, included and not included, in the formation documents. Generally, the attorney will represent the best interests of the business entity being formed, not the individuals who formed the ultimate business entity.