ESSAY: THE JOINT VENTURE

Becky, Thomas and Susan have been friends in college since Freshman year. Becky has always loved baking, and she specializes in custom designed cupcakes. Her cupcakes are always in demand at the various college fundraisers, parties and even faculty meetings. She has charged a nominal fee for her services while working on her degree, but at the last law school faculty dinner, Dean Margaret Keller, the dean of the law school, told Becky, "You should really take this baking hobby full time. These cupcakes are awesome!"

Becky approaches Thomas, who is a business major, and Susan, who is a marketing major, with her idea to take "Creative Cupcakes" from her apartment kitchen to a full-service, gourmet cupcake business. She wants them to join in her venture. Becky and Susan have located the perfect store location for the bakery in a hip revitalized section of the city undergoing urban renewal. The store already has a commercial kitchen, which is up to code, but the team will need to buy equipment, since the prior lessees took or sold the prior equipment off. The location is also close to the university, where the team plans to start its marketing and sales efforts, since Becky's cupcakes are already a legend there. Becky has located the perfect ovens and other commercial equipment from a nearby bakery going out of business, and Susan has put together a marketing blitz campaign for social media in the community once they are ready to open.

Thomas has drafted a business plan, and he estimates that they will need $100,000 in start-up capital to cover the lease, equipment purchase and installation, some minor cosmetic repairs and improvements for the store, and working capital until their income becomes regular and dependable. Becky has $5,000 in a savings account from an inheritance, Thomas has $17,500 saved from working since age 15 at various businesses, and Susan has $2,500 in savings. The 10 team needs to arrange financing or investor capital or both in order to turn their venture into reality. Becky approached Dean Keller, and she is excited about the idea. Dean Keller is willing to either loan the team $50,000 at favorable interest rates (10% above the federal short-term rate, adjustable semi-annually, for a term of 10 years) or take a stake in the venture. If she gets a stake, she wants her ownership to be at least 33% and wants a vote on the board (she insists on the corporate form and its formalities). Thomas has approached his parents for a loan, and they will provide him personally with a loan for another $12,500. Thomas is willing to provide $30,000 total of capital, but insists on 35% ownership of whatever entity they form, based on his business expertise that he will bring to the venture and his sizable capital contributions. Susan has approached some sorority sisters for a capital contribution. She plans to pool her $2,500 with theirs funds, for a total of $15,000. They are calling their shares the Pink Sisters Voting Block, because pink is their sorority's theme color. The Pink Sisters insist on ownership of at least 15%, matching their capital contribution, but they also want a vote on the board if the venture is structured as a corporation.

Becky comes to you seeking advice on the proper structure of the joint venture. She plans to take your advice back to the team to discuss which entity form they should choose and how to divide the ownership and voting or management rights between the team and investors. Becky is not thrilled to be left with only 17% of the ownership of the venture. She would prefer some way to possess Dean Keller's 33% for a total of 50% ownership, but she also recognizes their need for investors to make this dream a reality.

Write a memo advising her on the possible business entities, ownership and board/management structure and any related issues with control of the entity vis-a-vis the management team, the owners and investors.