A started an online business (India) on his own. Now he wants B and C as partners to register an LLP. But A wants to retain 20% of share (he calls it founder's share) aside without any liability of loss. From remaining 80% A, B & C will hold 30%, 30% and 20% respectively for their partnership, but we have to share the entire 100% loss in the ratio of this partnership. Now the situation stands as: Share of Profit: A:B:C = 50 : 30 : 20 Share of loss : A:B:C = 37.5 : 37.5 : 25 Moreover, A claims, if we need to add a partner, our existing shares will go down in the ratio of this partnership, leaving that 20% founder's share untouched. Now the question is: Is all this legally valid and fair enough? Is it fine for us (B and C) to join this?
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This would be legally valid, although not necessary "fair" under U.S. law. I don't know the answer under the law of India.– ohwillekeMar 1, 2017 at 17:28
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Thank you! But need the answer in Indian context.– JayantaMar 1, 2017 at 17:31
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Understood. I just don't have that answer. Hopefully, someone else does. Although no country's law will tell you if it is "fair". That is something that the business people need to decide for themselves. I wouldn't consider this deal "fair" but someone else might.– ohwillekeMar 1, 2017 at 17:41
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Can you please suggest a modification to this deal that would be fair according to you (not to forget the founder's role, though)?– JayantaMar 1, 2017 at 17:45
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Does this mean that A has 50% of the voting shares? If there is a dispute, who breaks the tie? I would say that this would need to be dealt with even without the profit and loss question.– sabbahillelMar 1, 2017 at 19:13
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1 Answer
Yes, this is a valid deal as per the Indian law, though is not necessarily fair. We have removed the 'founder share' from the deal and moved to a simpler deal with a share ratio of 50:30:20. The founder, A, is already getting value for his contribution in the form of the largest portion of share, so there is no need to allow additional benefits.