Read the following scenario and answer the question in 5-10 sentences. You are a

Question

Read the following scenario and answer the question in 5-10 sentences.

You are an expert in the field of advanced laser technology. You believe there is a profitable, though risky, commercial market opportunity for a new and more effective photonic crystal laser. The investment could result in a financial success, but could also result in no new innovations even after significant research costs. It requires a number of experts to coordinate in order to develop the new lasers. You invite eleven people that have never worked together to develop the new technology. You want to form a limited liability company in order to protect the interests of all participants. Evaluate the possible management structures and key terms of any operating agreement that should be considered in order to form an LLC.

Explanation / Answer

Deciding on the management structure and key terms of operating agreement

1.       Core element of operating agreement, first it needs to be decided on the provisions related to equity structure and then management, voting, limitation on liability, there is also need to consider anti- dilution protection, and also restriction on transfer, buyout, dissolution and liquidation.

2.       Equity Structure: Each member would have a capital account. Initially it would be decided based on each member capital contribution. Members contribution could be in any form i.e. cash, property, services rendered, promissory notes or any other form of obligation to contribute cash, property/service. Operating agreement will have allocation of profit based on the capital contribution. If the capital contribution is equal then all the profit/loss will be shared equally. Thus profit/loss will be equivalent to amount of capital contribution that each member does.

3.       Management: There are two options available here they can go for either member- managed or manager- managed. In this scenario it is recommended to go for Member-Managed, so all the owners will be managers in this case.

4.       Voting: Each of the member will have voting rights equivalent to the capital contribution and percentage interest in the LLC firm.

5.       Anti-Dilution Protection would be included in the agreement, this will allow existing members to maintain the membership interest percentage in the case, when a consideration for addition of new member is taking place in the future scenario. This will include a veto-right, whereby approval of each of the existing members(11 in this case) is required before adding a new member

6.       Restriction on Transfer: Here also 2 provision would be given 1) Veto/Approval rights 2) Right of First Refusal. In Veto/approval rights: Transfer of Membership would require the consent of all the members. 2) Right of First Refusal: Members would have the right to carve out certain transactions from the restrictions on transfer, such as transfers to the affiliates and / or for the estate planning purposes

7.       Buyout option: Certain events like Death/disability/bankruptcy would give other members to buy out such member’s percentage share.

8.       Other General Provision to be included in agreement: the general provisions would include a provision requiring members to settle their disputes first through non-binding mediation, and then followed by binding arbitration. There would be provision regarding required vote to amend the operating agreement

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