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Start Ups and Emerging Companies – 101: Operating Agreement

January 14, 2013

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LLCs are a very flexible form of entity because they are governed and operated by a contract, which can be drafted to meet the specific and diverse needs of the founders and investors.  The members may have general (common) or preferred rights.  Preferred membership interests/units are generally reserved for enticing Private Equity investors to invest in the company when operating funds are needed to bring the company to the next level.

The Operating Agreement is a master agreement, and may contain clauses similar to the Bylaws and Shareholder Agreement of a Corporation.  In addition, the Operating Agreement defines the members' respective interest in capital, profits, losses and management, as well as what to do in case of a disagreement among the members as to the direction of the company. 

A single-member LLC is a simple document that gives unlimited power and control to the member to operate the business how he or she deems fit.  On the other end of the spectrum, an Operating Agreement may be structured to allow for features such as employee option pools, capital contributions, restrictions on transfer, and buy-sell, co-sale, put/call and drag along rights.  In addition, preferred membership interests may receive certain preferences that are not available to the other members, such as preferred rights to dividends, distributions, voting privileges, liquidation preferences and anti-dilution rights.

For more information, please contact:

Derek Ridgway

925-746-8484 Direct Phone
925-746-8493 Fax

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