A Crowdfunding Corporate Legal Structure, Ipad 3 style
April 9, 2012 4 Comments
The structure above involves a separate crowdfund holding company (Crowdfund I, LLC and Crowdfund II, LLC above, each a “HoldCo”) for each round of crowdfunding. The HoldCo would purchase shares or convertible debt from the Operating Company and act in the same manner as any other shareholder.
The benefit of this structure is that the Operating Company now only has to interface with 1 shareholder instead of potentially 1,000+ shareholders. This will make things a lot easier when it comes to stockholder consents, issuing stock certificates, containing confidential information, selling the company, redeeming or selling the crowdfund shares in a single transaction (e.g. if a VC wants to buy out the crowdfunders), distributing profits, and many more common stockholder functions. This will also avoid the need for the Operating Company to adopt a complicated corporate structure, which can make future financing more difficult.
The Holdco would issue HoldCo shares to each crowdfunder and would be managed either by a lead investor or a professional management company (See Crowdfund Mgmt, LLC above). This manager would act on behalf of, and have fiduciary duties to, the crowdfunders.
The corporate governance of this HoldCo is where things get interesting. Here are a few things to consider:
1. Manager Election: Should the crowdfunders have the right to elect and/or remove the Manager?
2. Voting Rights: Should crowdfunders have any voting rights? Should they have the right to vote on a sale of the HoldCo or substantially all of its assets? What other events should require a crowdfunder vote, if any?
3. Transfer Restrictions/Secondmarket: What are the transfer restrictions applicable to the crowdfunders? After the 1 year restriction period expires, will they be able to sell on Secondmarket?
4. Shareholder Rights: Will crowdfunders have the benefit of pre-emptive rights, tag-along rights, registration rights, and other stockholder rights? How will those flow through the HoldCo?
5. Fiduciary Duties: What is the scope of the fiduciary duties of the Manager?
6. Fees and Expenses: How will ongoing fees and expenses of the HoldCo be paid?
7. Taxes: What are the tax implications to the crowdfunders and the Operating Company? What about angel investing tax credits (e.g. Georgia Angel Tax Credit)?
What are some concerns or problems with this structure? What other structures would be workable?