Question

Lamitz is the only shareholder of TekServ. She decides to merge TekServ with an IT business owned by two IT professionals that she respects. A new corporation, TKS, Inc., will be created to own the merged businesses. Lamitz and the other two professionals want to be the only members of the board of directors of TKS, Inc. Each wants to own 20% of the equity of TKS. Forty percent of the equity of TKS will be issued to a venture capital firm that will provide additional financing. The venture capital firm is willing to let the three IT professionals be the only directors, provided the business is profitable and the venture capital firm receives at least a 5% return on its investment each year. In addition, the three IT professionals and the venture capital firm plan for TKS to go public or be purchased by a larger IT firm within three years. However, the three IT professionals want to control absolutely whether TKS will go public or be purchased. They need to draft the articles of incorporation for TKS to create an ownership control structure that is best for all of the shareholders. Because this is a new corporation, they are not constrained by the existing structure of TekServ. How should the venture capitalist's shares be structured in terms of class and rights?

Answer 1