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Term Sheet for an LLC vs. a Corporation

Q: We have an interested Angel for an investment in our startup LLC. We have a strong lawyer for support. We’d like to submit a draft Term Sheet to, as you say in your blog, “control the paper”. Everything I find online about Angel Term Sheets contemplates shares, which presumes a corporation (vs. an LLC). We expect to give secondary (non-voting) membership as well as putting the investor on an Advisory Board. Can you point to resources that are more appropriate to an LLC structure?

A: (Brad) Your lawyer should be able to quickly crank this out.  There’s nothing special about it – just slightly different language given the notion of “members” vs. “shareholders” and the difference in how members rights are allocated / delineated.  I don’t know of any generic forms online, but if your lawyer doesn’t have this in a boilerplate form, I’d recommend you revisit the notion that you have “a strong lawyer for support.”

November 7th, 2007 by     Categories: Term Sheets    
  • http://www.haslaw.com Dimitry Herman

    As an additional resource, you may want to check out the following book. “Term Sheets & Valuations – A Line by Line Look at the Intricacies of Venture Capital Term Sheets & Valuations (Bigwig Briefs) (Paperback)”. Amazon: http://www.amazon.com/gp/product/1587620685/103-6922049-3374210
    As Brad indicates, there is probably nothing in there that your lawyer does not already know, but there are a lot of variations on the term sheet theme that may give you some new ideas.
    The one additional issue to consider is where your LLC is formed. LLCs are still a bit of an evolving creature and the statutory default provisions are much more limited. Therefore, your LLC operating agreement has to cover a lot more in terms of mechanics and minority protections that would have otherwise been necessary with a corp. This is more of an issue for the party that will be in the minority post deal, which I assume is your investor, but something to keep in mind as discussions continue.

  • Knox Massey

    As an angel investor, I’d insist on a C corporation. I’m biased a bit, tho–95% of the companies we fund go on to get institutional capital–which almost always insist on a C corp as well. My advice–think of the future, not just the present.
    Also, if a company I was investing in wanted to give me “non-voting” shares, I’d pass on the investment. Remember, it’s meant to be a two way street where all parties involved are succesful. At this early stage, it should not be who gets the “best” deal(“control the paper”, “non-voting”, etc).