Entrepreneurship, Second Edition

12.5. Stockholders' and Operating Agreements

Deborah, Dave, and their investor's respective investments will normally be memorialized in an operating agreement in the case of an LLC and in a combination of a stock purchase agreement, charter amendments, and stockholders' agreement in the case of a corporation. In the unlikely event that this business was a partnership or limited partnership, very similar provisions allocating equity interests and rights to distributions of profit and cash flow would appear in a Partnership Agreement. In all these cases, however, the parties would be well advised to go beyond these subjects and reach written agreement on a number of other potentially thorny issues at the outset of their relationship.

12.5.1. Negotiating Employment Terms

Dave and Deborah should reach agreement with the investor about their commitment to provide services and the level of compensation for doing so. It would be very unusual for Dave and Deborah to forgo compensation solely to share the profits of the business with their investor. For one thing, what would they be living on in the interim? For another, the profits of the business are properly conceived of as the amount left over after payment of the expenses of the business—including reasonable compensation to its employees. Thus, Deborah and Dave should negotiate employment terms into the operating or stockholders' agreement, setting forth their responsibilities, titles, compensation, and related issues.

This is especially ...