I have an LLC. I have 70% and my partner has 30%. If we bring another partner for sweat equity, does our percentage dilute?

Asked 11 months ago - Los Angeles, CA

I started this company and I also invested. I brought on a partner (who didnt invest) for 30% equity interest. I want to bring another partner who wants equity for labor, but can also invest. Does me and my partners equity dilute for the investment? How about for the sweat equity?

Attorney answers (6)

  1. Peter J Weinman

    Pro

    Contributor Level 17

    7

    Lawyers agree

    Answered . Yes, unless you figure out a way to squeeze more than 100% out of the entire LLC.

    I may be guessing or not licensed in your state. No atty/client relationship exists. I earn my living collecting... more
  2. Keith G Langer

    Contributor Level 19

    6

    Lawyers agree

    Answered . "Does me and my partners equity dilute for the investment?"

    Of course it does. There is presently 100% divided between two people. By bringing in a third party, of necessity there will be a reduction as you are dividing that same 100% among three people.

    A new operating agreement would seem to be required.

    The foregoing is for general information purposes and does not establish an attorney-client relationship.
  3. John Michael Phillips

    Pro

    Contributor Level 19

    5

    Lawyers agree

    Answered . Yes, you need to work out what percentage, from who and for what consideration (money or effort) the third partner must provide for that percentage. It all must be approved and equal 100%.

    Please CLICK the button if I HELPED or was BEST ANSWER. No attorney-client relationship is established and... more
  4. Erik R Overlid

    Contributor Level 7

    3

    Lawyers agree

    Answered . Yes, there's only 100% of the pie to divide-up. If you bring in a new partner (technically "member") then either one or both of the current members' interest will be diluted.

    However, a new operating agreement isn't necessarily needed. It depends on what the current operating agreement provides, and may just require an amendment.

    I would be more than happy to meet with you to discuss your options here, feel free to contact me if you're interested.

    www.OverlidLaw.com
    Small business legal services.
    Serving LA and the San Fernando Valley

    The response and opinions above are for informational purposes only, and are based on general principles of law... more
  5. Michael Charles Doland

    Contributor Level 20

    3

    Lawyers agree

    Answered . I agree with the postings of my colleagues.

    Now is the time to stop and take a breath. Do you have a CPA? That's one person one your team you probably already should have asked.

    A more important issue is your issuing "securities" (whether stock in a corporation or membership interests in an LLC). If you are not paying attention to your disclosures and disclaimers and filing the correct forms with the Commissioner of Corporations you may have problems in the future regarding your issuance.


    Further, since you are all not related, if you don't have a buy-sell agreement in place, in the event of death, disability or retirement there is no public market to sell your shares to and no right of first refusal if one of your "partners" wishes to sell.

    Probably a good time to retain an ongoing outside general counsel to advise you on the multiple issues that face all small and medium size businesses. From trademark issues to employment - there is a lot.

    The above is general legal and business analysis. It is not "legal advice" but analysis, and different lawyers may... more
  6. Charles Michael Standard

    Contributor Level 9

    Answered . I would suggest having an attorney draft another operating agreement, covering each party's rights and responsibilities. You can use Avvo's "Find a Lawyer" service to assist you. (408) 796-9616.

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