Members voting rights in a syndication

[Ellie Perlman]

I'm currently raising money from investors, and was asked by one of them about the voting rights in case of a sale. This investor is willing to invest $50K, and worried that if there will be someone that will invest say $500K, than his voice will not count in case they are voting an a sale.

When it comes to large deals ($10M and above), do you, as the syndicator, give investors voting rights?

If so - does 1 investor = 1 vote, or do you tie their vote to their relative investment amount?

[Brian Burke]

Typically you would specify in the business plan when the sale would take place.  For example your operating agreement might say that you will hold the property for ten years, but, at the discretion of the sponsor the property can be sold sooner.  This gives you the ability to decide on exit timing and a vote is only required if you feel that the sale needs to occur later than ten years. 

If a vote is required the investors vote pro-rata, so yes, a $500K investor has more votes than a $50K investor. As much as your $50K investor might be worried by being drowned by a whale, the whale wouldn’t want to be beached by a minnow either. It cuts both ways. 

Some sponsors specify an exit timing of three years or five years.  You could do that, too, but then you are far more likely to require a vote if an adverse market cycle derails your exit. I write mine for ten years so that everyone is onboard for the long haul if that’s necessary, but we make it known that our plan is to sell in 3 years if we can, five years if it’s necessary, and ten years if we must. The economy and market dictate which, and we are the judge and jury as to making the final decision (but we do this with an informal solicitation of our investor’s opinions).  

We can do this because of our relationship with our investors and our track record. People trust us to make these decisions because we’ve proven ourselves. If you are new at this or haven’t gotten to that point yet, your investors might not be comfortable giving you this power. That’s fine, just come up with your planned exit timing and a voting procedure if you need to deviate.