Contributing LOI for Tax-Free Fee Rolled into Deal

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by a searcher from Massachusetts Institute of Technology - MIT Sloan School of Management
in New York, NY, USA

2yrs ago

Contributing LOI for Tax-Free Fee Rolled into Deal

Has anyone successfully earned a deal fee on a tax-free basis, and rolled that fee into a deal in exchange for equity in the target?

There is discussion that this can be accomplished by contributing the LOI as property in exchange for a fee, that fee is then paid directly to the company, which then issues equity. The taxable event would be capital gains upon an exit.

Thanks in advance!

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reply by an investor 1yr ago
from The University of Chicago in Chicago, IL, USA

It is not uncommon. Fundamentally a new LLC is established with i.) the sponsor contributing the LOI into the entity and ii) the capital providers contributing cash for the acquisition. The LLC becomes the buyer. The parties of the LOI should be the seller and the sponsor (not the capital providers), and all time extensions of the LOI, if any, should be documented and up-to-date through closing.