Equity in only Part of a Business?

[JMFACCT]

I work for a company that builds and monetizes websites (company A). The company owner wants to develop a strategic partnership with the owner of another company that also builds and monetizes websites (company B).

Both companies own multiple web properties that generate revenue and both are structured as an LLC.

Issue 1:

Company B told Company A that A could have a 30% equity stake in ONE of company B's web properties for X amount based on the web property's current market value.

However, since the web property is only one property of the total web portfolio of company B, I am arguing that company A is essentially being granted a smaller (less than 30%) interest in Company B in total, since the property to which A was given interest is not treated as a separate entity, does not have its own books and records, nor has its own membership units.

Company B is stating that this was not the agreement and that A does not have any equity stake in B in total, but only in the specified web property. Is this possible? How would profits and losses be allocated on a K1 if the property in question is not a separate entity?

Issue 2:

Company B has asked A to contribute money to help cover the monthly cash flow of the specified web property, however does not want to treat the funds as an additional capital contribution or a loan. B is arguing that A is obligated to "share expenses" since A has an equity stake and that A is not going to be granted any additional equity or creditor rights to provide the cash. B is wanting the cash because the property in question is currently operating at a loss. B refuses to treat the cash as capital or a loan, yet is demanding that A pays or is threatening to "roll back" the equity (which I presume he can't do, because A gave consideration). I'm not even sure how this would be recognized on B's books if not as capital or a loan. As revenue? Are there any reasonable grounds for B's position?

 

[kirby]

Company B owner is a genius.

I think the accounting for this is covered in the book " The Emperors New Clothes" by Anderson.

 

[JMFACCT]

Forgive me if I don't fully see how the literary reference applies.

How exactly is Company B a genius?

we are still getting equity (albeit smaller) of company B in total. This is OK with us because B in total makes more money than the single web property we supposedly invested in. While its not what the owner of A originally intended, this is not the end of the world (although Company B owner does not see it this way, it doesn't change the fact that we have already contributed the capital)

sorry if I am being dense, but I am trying to clearly explain/make this position to both parties and want to make sure I am interpreting the situation correctly.

Thank you

 

[kirby]

Company B got your money
and in return
did you shares of his stock? No
did you get a loan agreement with stated repayment terms and stated collateral? No
Really unclear as to what company A got.
I don't think the courts have defined legally what "equity in a web property" really means
If company B goes BK good luck in convincing the receiver that you have a secured interest in "equity in a web property"

and

,again, (wait for it.....)


Company B got your money = Genius!

 

[Counterofbeans]

Several questions...

Do you have a legal agreement? That really needs to be reviewed.

These comments don't reconcile, so I don't understand:

Company B told Company A that A could have a 30% equity stake in ONE of company B's web properties for X amount based on the web property's current market value.

Company B is stating that this was not the agreement and that A does not have any equity stake in B in total, but only in the specified web property.

What makes this even more dubious is the fact that, in the argument below, he's back to stating that Company A has an equity stake and needs to share in the expenses.

Seems like this guy is a little bit full of crap and is talking out of both sides of his mouth, favoring whatever benefits him.

Company B has asked A to contribute money to help cover the monthly cash flow of the specified web property, however does not want to treat the funds as an additional capital contribution or a loan. B is arguing that A is obligated to "share expenses" since A has an equity stake and that A is not going to be granted any additional equity or creditor rights to provide the cash. B is wanting the cash because the property in question is currently operating at a loss. B refuses to treat the cash as capital or a loan, yet is demanding that A pays or is threatening to "roll back" the equity (which I presume he can't do, because A gave consideration). I'm not even sure how this would be recognized on B's books if not as capital or a loan. As revenue? Are there any reasonable grounds for B's position?

I'm literally shaking my head at this one...

How does Company B want to record it as then? He has to debit cash when it hits the bank account, so he's going to credit...ummm...

And no, revenue does NOT work here.

That sure as hell smells like A.P.I.C. to me...

The first question I have is this: the $$ that is delivered to B from A. How do you plan on recording it on your books? I would think that the accounting should "match" to a certain extent. For instance, if you record a receivable, he should as heck should have a payable...

It seems to me like the ownership interest isn't going to increase, so I'd have a tough time increasing your investment in B. Sounds like an expense on A's books and APIC on B's books.

That's my initial take. I'm going fast though...

 

[JMFACCT]

Counterofbeans, thank you for helping me work through this.

No, there is no legal agreement. The deal was made between A and B on a handshake.

When A made the deal he didn't realize (or perhaps think to ask) that the property was not a distinct entity.

B confirms that we agreed to interest in the specific property, but not in his larger business (which doesn't even make sense, and is exactly what I am trying to argue). So that is why he is asking A to share expenses for the specific property (because he confirms that A&B agreed to ownership in that).

The expense sharing was NOT part of the original agreement, and I am arguing that if B wants more cash, it has to be treated correctly. I do not know how he intended to book it, he clearly didn't think through or understand that it is APIC before asking us for it. Once we stated that 1). We wanted the web property in question moved to a stand-alone entity that A&B would be partners in OR have B confirm that we have an equivalent ownership percentage in B in total and 2). additional money contributed would be APIC or a loan, B said it was getting "too complicated" and just offered to give us our money back. For what its worth, the original money we gave to him was debited to "investment in B company." At this time we have not given him any money for "expenses".


B clearly doesn't understand business and accounting rules, nor wants to play by them. The problem is, A really wants to retain the partnership and be involved in this web property. He asked me to find a solution. I'm at a loss for how to advise on an equitable solution for them if B refuses to play by the rules.

Sounds like we should probably bring this to legal counsel. I appreciate the input though as it backs up my position that they should not proceed with the handshake agreement they have and in no way should A give B more money without him committing to proper treatment.

 

[Counterofbeans]

No, there is no legal agreement. The deal was made between A and B on a handshake.

I hate to say it, but yes, that's a serious problem. With no legal agreement in place, it's difficult to say what the correct accounting is.

When A made the deal he didn't realize (or perhaps think to ask) that the property was not a distinct entity.

Oops

B confirms that we agreed to interest in the specific property, but not in his larger business (which doesn't even make sense, and is exactly what I am trying to argue). So that is why he is asking A to share expenses for the specific property (because he confirms that A&B agreed to ownership in that).

What exactly does it mean, "interest in the specific property?" Will A be issued something, anything?

The expense sharing was NOT part of the original agreement, and I am arguing that if B wants more cash, it has to be treated correctly. I do not know how he intended to book it, he clearly didn't think through or understand that it is APIC before asking us for it.

I'm struggling to understand how either one of you can record this transaction, as it's not clear who gets what.

Once we stated that 1). We wanted the web property in question moved to a stand-alone entity that A&B would be partners in

This is not a bad idea and something I'd consider strongly. This smells like a joint venture, which it sounds like was the original intention.

OR have B confirm that we have an equivalent ownership percentage in B in total

Yes, B needs to clearly state what he thinks he's giving up for the consideration received.

2). additional money contributed would be APIC or a loan, B said it was getting "too complicated" and just offered to give us our money back.

Well, it sounds like there's a way out, if needed

For what its worth, the original money we gave to him was debited to "investment in B company."

That makes sense to me. But this would mean that his company now has "non-controlling interest" and such would need to be recorded on his books accordingly. Basically, your ownership % times company A's equity should equal Investment in company B on your books. It doesn't sound like he recorded anything though, as he doesn't agree that he's given up any ownership in company B. For him to take the cash though--umm, what did he credit? It just doesn't make any sense...

At this time we have not given him any money for "expenses".

Yes, you are running into issues because the above wasn't clear. I don't understand why he would want company A to share in the expenses---they already are if they own X% of the company (which means that the cash company A gave B is being used up)

The problem is, A really wants to retain the partnership and be involved in this web property.

My initial take is the same as you mention above. Why not just contribute the website to another entity to which A & B can contribute assets and be partners in. It isn't complicated, nor unusual. That seems to make the most sense in my mind. Perhaps an attorney can get creative here, but that's the route I would go.

Sounds like we should probably bring this to legal counsel. I appreciate the input though as it backs up my position that they should not proceed with the handshake agreement they have and in no way should A give B more money without him committing to proper treatment.

I'd only involve attorneys now to get a deal done, not to cause problems. It seems like something that can be resolved. If B doesn't want to do that, I would raise an eyebrow. Joint Ventures like this are very common.