I’m considering a deal where the owner wants to keep a 5% equity stake and serve as an advisor. I am creating a consulting agreement with a monthly cap on hours and expectations. The goal for the owner keeping the stake is to help with a growth strategy and lessen our debt burden. Has anyone done something similar? Any pros/cons and insights you can offer?
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(1) Seller will retain a minority equity position in the business going forward. This is dealt with in the operating agreement (or similar document). A 5% interest shouldn't entitle the seller to many rights. Perhaps the seller has some veto power over, for example, amending the organizational documents of the company. But otherwise, the seller should only benefit from standard minority protections such as preemptive and tag-along rights.
(2) Seller will become a contractor. This has nothing to do with his minority stake. You are free to negotiate the terms of his advisory role, as you see fit. Where does it make sense for the seller to help? How much does the seller want to be paid?
You don't need to do (1) to do (2) and vice versa. Although if you are relying on SBA debt, it makes sense to combine these two deal points. Otherwise, the seller would be limited to a 12 month contract at most.
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