I am a co-founder in a company with 5 other partners. We all put in capital based on our % ownership. I also got 5% sweat equity for free, because I'll be working in the business. We now have a capital call to raise funds. They are factoring in my 5% equity (on top of by 10% ownership which I paid into). Is that correct? Should my contribution be based on 10% or 15% ownership? Thanks!
2 Answers from Attorneys
15. You didn't get the 5% "for free." You contributed time and labor (sweat equity) in exchange for that 5%; that's as valuable as cash.
Maybe you can sell 5% of your stake if you don't have the money for the capital call.
Though my colleague may be technically correct, whether you are obligated to advance any money, as a result of the capital call, depends on the bylaws / operating agreement of the company and on any agreements you may have signed directly with the company.
Therefore, you may not have to put in a single dollar. To figure this out, the company docs and any agreements you may have signed have to be reviewed!
I represent startups and entrepreneurs and have a special rate for lawguru users. Generally speaking, a document review is not an expensive undertaking and may save you a whole bunch of money. Contact me directly.
Roman R. Fichman, Esq.
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