Is there a way to enhance security of Minority Equity Position???

Question

Hoping someone can help me with this? I am in the process of putting together a JV and my needs from the investor are such that only a minority equity stake position (with preferred returns) is justified. I have several investors considering the deal and the feedback is that they are happy with the returns offered but being a minority stake holder is too risky. They fear that I as majority stake holder will have too much power and they would have no voice on things like when dividends are issued, myself voting to start receiving a salary, etc.

Cross-collateralizing other properties is not an option because although I have significant equity, all of my investments are leverage at 40-60 LTV so they would be pushed into a second position which doesn't accomplish much in this instance. Plus, if I were to go that route, I would just pull cash and fund the entire deal myself. I rather not go that route.

Instead, I am wondering if there is a way to address their concerns. My initial thought is to create an iron-clad operating agreement prohibiting me from doing any of the things that they fear without their consent. In essence, despite being a minority equity position, we would have equal voting power. The trouble with this is that it results in a situation where a disagreement would be an automatic stalemate and therefore require litigation....and at that point we both lose!!!

Any suggestions would be awesome!

Hans Restuccia · Answer

There is no way I would invest the lion share of the funds without having the lion share of the control- that is a natural concern for the money man in the deal. Therefore, I offer a loan instead of a JV usually.

Will Barnard · Answer

The operating agreement and placing the funding partner(s) with a lien would also provide them all the rights as a lien holder.

Bill Gulley · Answer

Think Ned put it in a nut shell.

What are the specific concerns, ultimately partners need to trust each other, if you can't do that, walk away. If the concerns can be addressed, they can usually be put in writing, defined and agreed courses of action required.

You could also define certain admin functions that would require unanimous consent of all members/partners to change or modify, those matters would then be under your control. On the flip side you could set some aspects over to them specifically.

So, in the Operating Agreement, you can break down activities and require unanimous consent by all partners to do or not do do something, you can have other activities that only require a vote upon notice by a certain number of partners, then, some activity may be conducted without consent of any other partner or, perhaps with consent of a minority, like 2 of 5.

I'd also consider a hold harmless or limited liability be considered by and between partners pertaining to management or conduct, but excluding fraud and illegal activities, that may make some feel better.

Then, as Ned suggested, put thier capital contribution in the operating funds as a loan having priority, by law as well ass by agreement, with assets of the partnership securing such amounts, all accomplished by internal agreement and adopted in the minutes.

If you all trust each other it can be worked out, if anyone is not warm and fuzzy, find others you can be. :)

Ned Carey · Answer

They can be a lender which puts their interest in front of yours. (By Definition a break even deal means the lender gets paid and you earn nothing)

I think your idea of addressing the concerns in your JV agreement is best. The concerns you mentioned are easily addressed.

This is a negotiation. It could be those "concerns" are an easy way to say no because they do not want to offend you. Also consider the takeaway close. Say "I understand, perhaps this deal isn't right for you. I will have one of my other investors fund it." Good luck - Ned

Is there a way to enhance security of Minority Equity Position???

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