Taking Stock in Clients

All,

I run a contract engineering firm, and I'm considering taking stock in some of my clients in return for reduced rates. I feel comfortable doing this given the continued level of income from that client, cash in the bank, and the clients product, as well as reading about the success of a few other firms that did such.

Here's my questions:

My client is an LLC and I'm an S Corp, can my company own part of that company?

They're offering me a number of units, how can I calculate the current and future value of these units?

What does it really mean to own a part of the company/units? I suppose given the structure I'm entitled to a certain level of voting/control, but how will these actually bring me value? There are no dividends, so I'm basically looking at the sale of these units once they're later appreciated?

Thanks,
Ken

how can I calculate the current and future value of these units?

That's very tricky. If you knew the cash flow generated by their business, then calculating a value is not that hard, see here and then here. The trick is guessing / estimating / divining the future cash flow of the other company.

I suppose given the structure I'm entitled to a certain level of voting/control

Probably not really. Maybe you can get some precise answers here (not from me, I assume you're asking about US law, and I don't know much about that). Otherwise please go see a competent lawyer. But basically, as a minority shareholder you're able to influence by persuasion on the general assembly of the company, and not much more. As a shareholder, you're normally not involved in the day to day operation of the company, you're only involved in the topics that are voted on at the general assembly -- and here you should expect the majority shareholder / shareholders to vote in their own favor (i.e. decide in their own favor).

There are no dividends, so I'm basically looking at the sale of these units once they're later appreciated?

The shares will give you money if:

• The company later decides to pay out a dividend.
• There is an "exit scenario", i.e. the company is sold to another company, or becomes publicly traded on a stock exchange.
• You are able to sell your minority shares privately, either to one of the existing investors, or to a 3rd party. Note that there can be a shareholders agreement which can limit this or outright make it impossible.

If you decide to get shares (and I'm not against this at all, it can be a good deal for everyone involved) then I recommend that you talk to a lawyer who is specialized in business affairs. Ask the other shareholders for the company bylaws and shareholder agreement (if there is one) beforehand, and then give these to the lawyer so he's well prepared when you meet.