Ask HN: Owner wants to buy out my 1.5%, what do I need to consider? | Hacker News Reader

Ask HN: Owner wants to buy out my 1.5%, what do I need to consider?

12 pointsdm0351413 comments

I would love suggestions on what to consider when making the decision of whether to sell my stake in a company.

Background:

I am a 1.5% partner of an LLC that I worked for about 5 years ago. The owner called today and offered me $4500 for my equity.

I've been spending all night reading about multi-member llc's, capital accounts, distributions/draws and our Operating Agreement. I've watched my capital account grow each year from negative to where it is now at $3200. I believe in the owners ability to continue being profitable.

I would love any advice on how to think about this or for any pointers on what I need to consider. I'm not a lawyer or accountant so much of this is brand new to me.

Thank you for your time.

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You need to consider what you are going to spend that money on.

Seriously, unless you think that your share is worth a vast amount more like 25-30X more..., take the buy out.

You are talking about what maybe the minimum amount needed as a retainer to procure a lawyer, so take the money, move on, it was a great investment that was profitable.

You said it was 5 years ago so what are you hanging on to?

If you have a good relationship with this company, or the person making the offer... take your ransom and stop holding your 1.5% hostage.

But who am I other than a random person giving you free advice..you get what you pay for right?

Still take the money, chances are it is less than it's worth but what it's worth and what you will get are not necessarily the same amount.

Take tge money!!!

Thank you, Ha i will!

all i was considering is what I'm going to do with the $$ :)

good points, i was already massively leaning towards taking it 95% just wanted a quick sanity test from HN

You can ask, but likely maintaining a large number of partners in the LLC structure is creating headaches (or is just a nuisance) since you're no longer around.

Unless you think there's an imminent payday and he's trying to claw back some of your equity at a below-market rate (doubtful), do them the favor of accepting the offer.

Especially if you're otherwise on good terms.

There are some tax traps around exercising options and then having the value of the stock plummet, but if this is 'real' equity then I'm pretty sure it doesn't apply.

Talk to them about the tax treatment (because they know it better than you) and counter offer with $5k because that way you earn $500 in ten seconds.

> I believe in the owners ability to continue being profitable.

Cynical thought: Do you trust the owner enough to not sunset that LLC and "continue being profitable" under a new legal entity, if they think the 1.5% equity you refuse to sell back is going to be worth 10x or 100x what they're offering you right now?

That's one of the first things I thought about :) Not much friction for him, his customers will def follow him around, the only friction will be from the legal part of it and the rebranding ahh

I think that the costs of liquidating and reforming would cost far more than $4500. A 1.5% stake can be easily diluted in value by issuing more stock.

That's assuming the other guy doesn't already know he'll get "far more than $4500" by liquidating. (Perhaps there's an offer on the table for a significant multiple of $300k and/or an acquihire, where he's already told the buyer he can sell them 100%?)

Assuming that you are on friendly or at least cordial terms with the owner, then why don't you actually have a chat with him. What has changed? How many other stock holders are there? Is he planning a big change in structure, investors? Is your stock holding simply a book keeping inconvenience?

In any negotiations, you first need to gather your facts. Once you have the facts, you might be in a position to ask for more, etc.

BTW if by your calculations it has taken 5 years for your stake to grow in value to $3200, then perhaps you could counter with a sell bid of $9500?

Just to add another angle. Do you need the money? If so take it. Or, if you think it'll be worth more or more useful later then wait. Time value of money.

LEGAL

LLCs are usually pretty simple. Usually, he has to get your agreement to do anything that dilutes you. Profits flow through as income to you. It is a bit annoying on the majority owner because (a) it is hard to raise capital and (b) you've got to file K-1s promptly every January so I can see why he'd want to get it all back.

ECONOMICS

So he basically values the business at $300K ($4.5K / 1.5%). My rough rule of thumb is that small stakes in small stable business should be worth around x3 ARR. If it is very profitable, it is worth a bit more. If not, it is worth a lot less.

If you can, you should ask him to send over the financial (P/L, balance sheet) and ask tax filing for last year. If he says no, check the operating agreement and see what it says you are entitled to (if anything) but basically ask him how you can judge what the shares are worth without seeing the books.

Personally, if he is willing to give you the books, I'd say that's a good sign that he is offering a buy out to make his life easier not grab the profits.

PRACTICAL

The main problem with arguing a majority owner about getting bought out is that he can always eat up the profits by paying himself more, especially if it is pretty small. The important question is why he wants the equity back.

This is just a negotiation so you want to understand why he wants to equity back and make a positive case for him to either pay you a fair value for it or let you keep it.

Consider framing your equity share as lost wages. Something like, "I took a $10K pay cut to earn that equity. I believe in you and what your doing and would like to stay in and share in the profits. What can I do to help make that happen?"

Consider exchanging the equity to a royalty so that he writes you a check every quarter based on revenue up to some limit (say x3-5 what he would pay today). Companies really can only sustain a 5% royalty on gross revenue and it would be divided between everyone he is buying out.

If he wants to convert to a C corp to raise money, then you could offer to convert to Common in the new corp but I'd tend to get my money out.

FINALLY

There is a tendency for small business owners (me included) to feel entitled to a large share of the profits to value their contributions above those of the people that have worked for them. We tend to take lot more risk -- as an owner, you are usually the last person to get paid. You have to (politely) make your case for yourself to counteract that.

If you are an engineer, I think the easiest/cheapest thing you could offer him as an incentive to think of you as someone he wants as a partner is help with hiring. It could be very useful to him when recruiting if he could point candidates to you as a closer. You'd have good standing to act as a reference for him.

thank you, this is amazing

I'd counter offer 5k for .75% of your 1.5% stake. You don't have any meaningful amount in terms of control, you get the money, and they get a proportion back.

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