Are you becoming a Member of a Business? Here’s what to look out for.
- Confidential information.
Depending on the nature of the business you are becoming a Member of, confidential information could be defined narrowly, as intellectual property such as patents or designs, or it could be as broad as company strategy, client lists, business practices, and other operational information. It is critical that these clauses are clarified, preferably in writing, to ensure that you understand what is confidential when you are operating in your new role as a Member. To ensure you know what is confidential, you can request a further breakdown of what the Company would consider confidential, or a request that information that is considered confidential is labeled as such throughout communications of the specified information. This will help you protect yourself moving forward, both as a Member, and if the relationship terminates and you seek to stay in a similar industry.
2. Time dedication.
In becoming a Member of a Company, you may already be a full-time employee, or you may just be a part-time entrepreneur working with or running a number of businesses. It is critical that you review the time management or time requirement clause to ensure that your expectations align with the Company’s. Further, many times a requirement of full-time dedication is boilerplate language that is also considered a material part of the agreement. This means that if the relationship goes south, the Company could theoretically rely on this clause to show a violation of the agreement and take action to remove you as a Member.
3. Remedies for Breach.
Remedies for breach could range from extremely strict to very lenient. We recommend ensuring there is a clear opportunity to cure, meaning a period of time to right the wrong. Note this opportunity to cure cannot be applied to all breaches, such as legal violations applicable to the business of the Company or dishonesty in financial dealings. Generally, you as a Member join into the LLC with a capital contribution or other exchange that affords you a number of units, or a certain amount of interest in the Company. It is critical to understand what impact your termination or breach has on your interest. For example, if you barely provided any contribution upon joining the Company, and the clause states that simply returning your contribution means that your interest is transferred back to the other Members of the Company, you can be bought out for that minute amount. Alternatively, it is preferable that your interest is purchased from you for the value at the time of your departure.
How any interest or assets of the Company is valued directly impacts every Member of the Company. This calculation can change how much an annual distribution is, how much interest is purchased for at the time of a Member’s departure, or how much a Member is paid if the Company is dissolved. Generally, valuation is performed by a certified public accountant (CPA) or accounting firm that is familiar with the business the Company operates in. Something to watch out for is valuation by the Manager alone. There is nothing to ensure that things are valued in realistic terms, especially where the valuation clause is defined by “in the Manager’s discretion.” Such language provides no checks and balances on the Manager to ensure the determination is defined by fair market value.
5. Restrictive Covenants.
One of the final clauses to pay close attention to is any restrictive covenant. These are generally non-compete and non-solicitation clauses in these types of agreements. They can sometimes be intertwined with or hidden in the Confidentiality clause. These may be upheld by a court if contested, but they must have some restrictions on them. These are generally in the form of geographic and time restrictions. For example, a non-compete that covers the entire United States is generally going to be struck because the geographic region is too expansive. Each state also generally has a reasonably approved time constraint, usually falling between 1 and 3 years. These agreements can hinder your ability to start your own company or even apply for new jobs when you leave the current Company. Pay attention to the manner of departure, attorney fees, and compensation for signing the non-compete. It is important to understand your own plans and goals as to how this can impact you in the future.
Remember, you are in a position to negotiate each term in the agreement before signing. It is recommended that you hire counsel to review and work with you on negotiating the terms to make sure you are protected, and your interests are supported in becoming a Company Member.
If you would like to learn more about any of the topics mentioned here, please call or text 484-801-0021 or reach out to Cassandra Ortner at firstname.lastname@example.org. We proudly support the nation’s business owners.
*Janelle Peyton is the Managing Partner of Peyton Law, a national boutique law firm providing general counsel and intellectual property legal services to small and mid-sized business owners and entrepreneurs. The firm offers business and brand building legal strategies; including business entity formation, contract drafting and review, human resources and employee matters, joint venture agreements, trademark and copyright protection, licensing & franchising, business succession planning, and mergers & acquisitions. Peyton Law serves as outsourced general counsel to companies in a wide range of industries. Visit us at peytonlaw.com.