How Angel Investor and Startup make used of LLP
In a startup environment. Usually, there is innovator,entrepreneur and Angel investor.
Sometime, entrepreneur and innovator might be same person. In some situation, innovator might not want to involved in day to day management and there is separated innovator and investor. However, usually entrepreneur or innovator might not have capital and required Angel investor.
Let say your business have 3 partners. Innovator, entrepreneur and Angel investor. Innovator will rpovide an Intellectual Property (IP) to the business, either a secret recipe for a restaurant business or a software he developed but he do not want to involve in day to day management of the business, or the other two partner feel he is not a good manager and do not want him to involve in day to day managment of the business. Thus, he only provide IP but no capital nor day to day managment of the company.
Entrepreneur will involve in day to day managment of the business but do not have capital nor recipe.
Angel investor will invest 200,000 in the company but he also do not want to involve in day to day mangment of the business, angel investor might have other business and want to get all the tax loss of the company, if any, to off set profit from his other business. Angel investor also demand that other partner will not share profit of the business untill he recoup all his capital plus 1.5 times of his capital. this mean profit of first few years will solely go to Angel investor until he recoup 300,000, then only innovator and entrepreneur able to share profit of the business.
It is very difficult to structure such distribution of profit under limited company (Sdn Bhd). Usually, under limited company (Sdn Bhd) If Angel investor get dividend. the other two partner must get dividend as well.
However, under LLP, such flexibility of distribution of profit able to be structure under LLP.
Let say all three partner agreed to share profit equally, but only after Angel investor recoup 1.5 time of his invesmtnet.
Illustration 1 : Distribution of Profit
Under limited company (Sdn Bhd) :
Year 1 Year 2 Year 3 Year 4
( 60,000) loss ( 30,000 )loss 300,000Profit 600,000Profit
Angel Investor (20,000) (10,000) 100,000 200,000
Innovator (20,000) (10,000) 100,000 200,000
Entrepreneur (20,000) (10,000) 100,000 200,000
Illustration 2 : Distributution of Profit
Under limited Liability Partnership (LLP)
Year 1 Year 2 Year 3 Year 4
(60,000)loss(30,000)loss 300,000Profit 600,000Profit
Angel Investor (60,000) (30,000) 300,000 200,000
Innovator 0 0 0 200,000
Entrepreneur 0 0 0 200,000
Illustration 1 show that demand of Angel Investor might not be fulfilled and negotiation with Angel investor might fail.
However, under Illustration 2 , demand of Angel Investor able to be fulfilled. Angel investor also able to make used of tax loss of first few year to off set profit of his other business to minimise tax. The other 2 partner, Innovator and entrepreneur will get distribution of profit in year 4 only after Angel investor recoup 1.5 times of his investment. Thus negotiation with Angel might be more flexible for startup company.
The above of the arrangement are follow limited libility company (LLC) in US. Please consult your legal consultant/accountant or comliance Officer (Company secretary) whether this can be implimented in Malaysia or not and get professional to draft your LLP agreement to set up such structure.
