Startup LLCs Pleasing VCs?

Transcript

ELIOT WAGONHEIM: Limited liability companies don't really lend themselves to go in public. If you know that one of your strategies is to attract investment, you might want to check, but a lot of investors don't like investing in limited liability companies.

RICHARD BOOTH: Ordinarily, venture capital firms insist on doing business with Corporations.

FRED PROVORNY: Well, sometimes they will invest in limited liability companies; it is clearly not their preference.

RICHARD BOOTH: Venture capitalists prefer corporations because they are more familiar with how corporation law works and they know what their rights are.

FRED PROVORNY: Venture capitalists maintain their influence over the corporation through a class of preferred stock that gives them seats on the board of directors and preferences in the event of liquidation.

RICHARD BOOTH: Most of the questions about who is entitled to run the corporation, how you elect the board of directors, who gets to hire and fire the officers, those questions are all pretty well answered by statutory law and case law.

EDWARD JACOBSON: In an LLC, it is much more flexible. You do not have those rigid types of rules.

RICHARD BOOTH: With partnerships and limited liability companies, many of those questions depend on the exact wording in the contract and it sometimes makes outside investors very nervous to be dealing with a unique document that has never been interpreted by the courts before.

ELIOT WAGONHEIM: If you know that your exit strategy is to go public, many times you would not start out forming your limited liability company. You would form a corporation.

RICHARD BOOTH: It is very easy to turn an LLC into a corporation if you need to do so, but from the tax point of view, it is a one-way street. You cannot go from being a corporation to being an LLC without adverse tax consequences that you really would not have to suffer if you simply started out with the LLC form.