Elves,
good on yer mate.
I was part of an 8-person business venture a few years ago, which lasted about 2.5 years before splitting. the main problem with 8 people was making a decision. Firstly, getting a quorum people to either turn up or have their input phoned in, wasn’t easy! Secondly, nobody was ‘the boss’ – it was a democracy. Eventually we made one of the members ‘the boss’ for certain administration issues. But then, you’d always get whingeing about it from the one or two members who didn’t vote for it.
So the lesson I learned is that basically democracies are flawed if wanting to move forward, simply because the chances of 8 peoples’ hopes and dreams exactly aligning with yours are very slim. So there will always be someone who is not happy, and the cumulative effect of that over time is not that great. So I reckon, be the boss. Be accountable to your joint venture partners, but be able to kick them out if they’re not working out.
ie don’t be able to be kicked out by them.
Just thinking worst case.
You could always start a company with you as sole director, and invite members of the joint venture to come in as shareholders, sharing profits. You have your legal documents drawn up specifying exactly what goes on etc a la Michael’s points.
Might cost you several K to get the documents drawn up
not to mention a few months so it might be too much trouble etc, nevertheless i thought it was worth mentioning because it was the option I went for while trying to figure out the best way to run what I’d call a ‘joint venture’.It was not the cheapest option, but it was the most professional one. it also allows for another class of investor to be added in as C-shareholders. And if all else fails, you have a company you can recycle.
The reason I decided to pick that structure is that I decided I needed the right to be able to decide who was in the joint venture.Pisces,
eww…“It is hard enough having to cope with my wife putting her nose into
my affairs let alone the wives of other possible joint venture partners.”double ewww
“thought you would know the difference between men and women.
It isn’t a matter of one being better than the other. The facts are that men just appear to be making decisions in a more rational manner.”I just lost all respect for you.
*ewwwwwwww* *shudder*
The negative stereotype of the boorish, bigoted Aussie bloke will survive a bit longer, thanks to you. Is this what you are teaching your children?
*ewwwwwwwww*
“For example, I married my wife for her money (rational decision making) whilst she married me for more emotional reasons.”
*ewwwwwwwwww*
“I hope everyone realises that this is just an in bad taste joke”.
So didn’t. Too little, too late, mate. “just joking” is often used by people trying hard to backpedal out of something that went down really really badly and pass it off as a joke. However, I don’t fall for it. My bullshit detector is UP.
“Firstly, getting a quorum people to either turn up or have their input phoned in, wasn’t easy! Secondly, nobody was ‘the boss’ – it was a democracy… you’d always get whingeing about it from the one or two members who didn’t vote for it.”
– This is an example of the importance of preparing an operating agreement prior to the formation of a joint venture – disclosing to each member their rights and responsibilities, liabilities etc, and the role of the “Managing Partner” [aka “the boss”].
If a partner does not agree with the terms, it is at the discretion of the partner
retaining a majority interest to amend the agreement or exclude the partner from participating.“You could always start a company with you as sole director, and invite members of the joint venture to come in as shareholders, sharing profits.”
– This is certainly an option to consider, however, unless you have the resources to move forward as a sole proprietor and establish equity in the company, forming a sole proprietorship in the first instance may counteract the benefits of a joint venture.
The benefit of a joint venture is access to finances/resources which in theory make a business more efficient and productive. If the company is formed prior to the members inclusion, there is the potential for members/investors to undervalue your participation [equity] because of a weakness they may identify in the operation i.e. caused by insufficient resources.
If a joint venture is considered vital to success, then the concept should be presented to potential partners prior to formation, followed by mutually acceptable investment and operating paramters outlined as the basis of a joint venture agreement.
“..invite members of the joint venture to come in as shareholders, sharing profits”
It is important to understand the difference between a “joint venture” – which generally assigns “units” to “members”, and a “corporate entity” – which assigns “shares” to “shareholders” – before deciding on the appropriate structure.
A joint venture is usually formed as a short-term vehicle, with a specific operating objective and “sunset clause” [expiration date] i.e. 1 to 10 years.
For example, a joint venture may be formed by several investors for the purpose of acquiring x number of SFH’s, renovating then on-selling. The joint venture expires after x years and profits are distributed accordingly.
Shareholders in a corporate entity have less control/participation in business activities. The business is often not restricted to a specific activity; less than 100 percent of the company’s equity/shares are sold – allowing for future fund raising and expansion [which equates to less compensation for shareholders versus members who retain 100 percent equity in a joint venture]; and, a corporate entity does not generally have a “sunset clause” – unless shareholders receive periodic dividends, they may not realize a return on investment until the company is sold, if at all.
Furthermore, unlike “shares” in a corporate entity, it is not common for “membership units” in a joint venture to be sold/traded. Although restrictions can be placed on selling shares if the corporate entity is privately held.
“It was not the cheapest option, but it was the most professional one. It also allows for another class of investor to be added in as C-shareholders.”
Because joint ventures are unlike corporate entities – in terms of members investing money for a specific period in exchange for x percent equity – share classes are a moot point.
Share classes specify the priority of profit distributions and are commonly used in corporate entities when several stages of capital have been raised i.e. the original investors/directors are allocated class “A” shares – with priority over other shareholders, the second group of investors receive “B” shares, and so on.
Joint ventures generally have a more straight forward structure, with equity assigned in proportion to the members/investors investment – it is not common for new members to be added after a joint ventures formation, but if so, each members units are diluted accordingly.
— Michael
Thanks Michael,
I don’t know whether I mentioned it or forgot, but the company structure I set up recently wasn’t for a property deal, it was for another type of project.
Although I thought was still worth mentioning, your comments were very interesting and give me a better understanding of the differences in companies and joint ventures and their different suitabilities.however – this bit i don’t understand – “unless you have the resources to move forward as a sole proprietor and establish equity in the company, forming a sole proprietorship in the first instance may counteract the benefits of a joint venture. “
I didn’t think a company needed to start with any equity? And couldn’t you do it like, Shareholder A is the boss and gets to decide who Shareholders B and C are. Shareholders B are those who share the profits. (Let’s say, 10 shareholders with 10 percent each, one of whom is ‘the boss.’)
then, let’s say there are 8 c-class shareholder who put in $20K each, but there are two more B-s than C’s, because two of the people sharing in the profits aren’t putting in any money, but time instead.Would that work?
cheers-
mini“I didn’t think a company needed to start with any equity?”
When a company or joint venture is setup as an entity i.e. Trust, LLC, LP etc, shares or membership units are assigned to the entity i.e. company XYZ has 1,000,000 shares; joint venture ABC has 1000 units.
Simplified definitions [Equity]:
1. A term describing shares/units, or any security, representing an ownership interest.
2. On the balance sheet, equity refers to the value of the funds contributed by the owners [the shareholders/partners] plus the retained earnings [or losses].
“And couldn’t you do it like, Shareholder A is the boss and gets to decide who Shareholders B and C are. Shareholders B are those who share the profits.”
A company is generally assigned a Managing Director or CEO who in this capacity can make these decisions – at times in conjunction with a “board”, which is not necessarily made up of shareholders.
Smaller operations which do not have “officers”, but have shareholders, generally stipulate in the operating agreement that shareholders with a combined interest of x percent must agree to the sale of shares and how the profits are distributed.
Although I could comment on the remainder of your post, without knowing the type of business and a number of other considerations, I cannot provide an informative response.
Either way, I would advise speaking with a qualified attorney who will clarify any questions you have.
— Michael
At last we are getting somewhere Michael. Thanks.
Mini rightly points out that everyone needs to be clear that the decision process has to be part of the the agreement, and rightly so.
I would be inclined to think that too many people involved in the decision process makes it unworkeable.
It is almost like the communistic system in Russia. It doesn’t work.
That doesn’t mean that there is no need to brief everyone as to what stage has been reached and what is going on sofar.
As someone else remarked : “Eight nice guys divided by one problem equals eight very shitty guys! “
And as I say ” Everyone is smiling when things go well but the moment something goes wrong everyone starts blaming someone else.”
There is another problem. The moment one invites too many people one may well need a prospectus and I guess that in the small deals we are talking about, that is to be avoided even if for the cost involved only.
There is one other most essential clause needed to cover a particular situation and that is if at some stage someone wants out.
It is possible to handle that in a very fair way.
Any volunteer clause designers ?Pisces
>>Either way, I would advise speaking with a qualified attorney who will clarify any questions you have.<<
The problem is that unless one has been involved in ventures one just wouldn’t have a clue (other than the most obvious ones) what should or shouldn’t be covered in the agreement.
As it is, the moment one thinks one knows all the pitfalls, something else pops up to create a problem.
Pisces
“The moment one invites too many people one may well need a prospectus and I guess that in the small deals we are talking about, that is to be avoided even if for the cost involved only.”
The Australian Securities and Investments Commission does not require a prospectus if you are raising less than $2 million from 20 investors/partners in any one year.
There is also an exemption to the prospectus rule if the money is raised from so-called “sophisticated” investors who are willing to invest in amounts of $500,000.
Although the exemptions mean a prospectus is not required to be filed or registered with the Australian Securities and Investments Commission, a borrower must still provide detailed information to potential investors/partners. This is an obligation under the Corporations Act, the Trade Practices Act and common law.
The expectation is there will be enough information for an investor to make an informed decision.
“There is one other most essential clause needed to cover a particular situation and that is if at some stage someone wants out.”
Included in the following “Article” [see earlier post]:
DISSOLUTION AND TERMINATION
“Any volunteer clause designers?”
If you are not experienced in contractural terms and conditions, legal jargon etc, do not attempt to proceed with “volunteer” clauses.
Such clauses are pertinent to you and any partners specific requirements and liability protection – and should be prepared by a qualified attorney.
“The problem is that unless one has been involved in ventures one just wouldn’t have a clue (other than the most obvious ones) what should or shouldn’t be covered in the agreement.”
Approach lawyers who specialize in the real estate segment you wish to pursue. If you do not feel comfortable with the lawyer, find another one.
The day I started out in this business, my first objective was to find the best lawyer and accountant available – who specialized in real estate investment/development.
I targeted the larger more respected firms knowing that if the representative I selected did not perform at 110 percent, it would have a poor reflection on the firm and potentially result in his/her demise.
The average hourly fee is slightly higher than the independent professional, however, the “value-add” that has transpired in terms of knowledgebase, access to resources and clients/potential business partners, has far outweighed the cost to date.
Do not look at lawyers and accountants as an expense, look at them as a means of protecting you and adding value to your business.
And as I noted in an earlier post, do not try to save a few dollars preparing partnership contracts yourself [if not qualified], no matter how small or large the transaction – it will more than likely cost you ten fold in the end.
— Michael
Well I certainly learnt a lot from this thread.
Thanks to all for the input.
For my little set up, i chose not to continue and while I did not explain anything like Michael did, I understand.
is it human nature to blame others? rather than accept we played a part…kinda easy escape eh? (the something goes wrong part, no one is smiling then)
Well, my venture stalled to begin, because no one could make a committment to the first meeting, that gave me the info I needed, they didnt think as I do, they didnt have the committment to it I did, and they wouldnt be there for the long term, as I would…so i basically said stuff em, I will do it myself.
I did, yet these people still come asking to start, well I figure they missed the boat…
elves
Elves, one time partners will turn into permanent partners once they have a bit more confidence which will come with time and success.
You may do yourself injustice by ‘ruling’ “You aren’t suitable because you are not prepared to make a permanent commitment right now”.
Pisces
Legal Advice:
I rang around a number of lawyers in my city, to conduct a basic enquiry, phone interview. The ones I liked the sound of (e.g. phone manner, clarity of explanation etc.) I called again.
Now the lawyer I settled upon to set up my Company Trust structure has been willing to create a Draft joint venture agreement for me. Free.
I figure there must be others out there who will do the same.
On another note;
I like signing off with my real name nowadays, since it gives me a sense of accountability regarding my comments and demeanour.
Regards, Adrian.
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