Question

 

Case 8: Case Problem 10, p. 1112 (Mallor 16^th Ed. Chap 42) (No citation is available.) EZStreet.com, Inc.

Josh Thomas, Jack Wiley, and Will Regis are three close friends who have been offered the opportunity to invest $100,000 each and to become 10 percent shareholders each in a closely held corporation that will be controlled by their friends Leone and Teddy Battat, who will own the remaining the 70 percent of the shares. The business, to be named EZStreet.com, Inc., will be an online business networking site. Leone and Teddy's plan is to amass at least 500 million users worldwide, which they estimate will take five to seven years, after which they would like to take the company public or sell it to another company, like Google. Josh is a CPA with 10 years experience in business consulting and investment management. Jack is a software engineer who has designed more than 50 websites. Will has an MBA in consumer and business marketing with 12 years experience in public relations and ad sales.

1. Because EZStreet.com, Inc. is a closely held corporation, he board of directors of EZStreet.com, Inc. may not issue shares to Josh, Jack and Will in return for their promises to provide services in the future; rather, they must purchase the securities for cash, tangible or intangible property, or performed services.
2. To guarantee that they get a return for their investment, Josh, Jack and Will should ask a salary for their services, rather than a mandatory dividend on their class of shares.
3. Josh, Jack and Will can ensure they obtain the capital appreciation of their shares if the company goes public or is sold by entering into a buy-sell agreement, which requires E-Z street or the company that purchases E-Z Street to purchase their shares at a purchase price equal to 30% of the market value of E-Z Street when it is bought out by another company.
4. When they purchased 30% of the shares in E-ZStreet.com, Inc., Josh, Jack and Will are not automatically given preemptive rights to retain their relative ownership of the shares of the company.
5. In order to ensure that they benefit from the public offering and can sell their shares in a public market, Josh, Jack and Will should require a provision in the buy-sell agreement that requires E-ZStreet.com, Inc. to go public with the same class of shares held by Josh, Jack and Will or provides that their shares are convertible into the class of shares used to go public.

Answer 1

1. True. Because EZStreet.com, Inc. is a closely held corporation, he board of directors of EZStreet.com, Inc. may not issue shares to Josh, Jack and Will in return for their promises to provide services in the future; rather, they must purchase the securities for cash, tangible or intangible property, or performed services.

2. True. o guarantee that they get a return for their investment, Josh, Jack and Will should ask a salary for their services, rather than a mandatory dividend on their class of shares.

3.True. Josh, Jack and Will can ensure they obtain the capital appreciation of their shares if the company goes public or is sold by entering into a buy-sell agreement, which requires E-Z street or the company that purchases E-Z Street to purchase their shares at a purchase price equal to 30% of the market value of E-Z Street when it is bought out by another company

4. True. When they purchased 30% of the shares in E-ZStreet.com, Inc., Josh, Jack and Will are not automatically given preemptive rights to retain their relative ownership of the shares of the company.

5. False. In order to ensure that they benefit from the public offering and can sell their shares in a public market, Josh, Jack and Will should require a provision in the buy-sell agreement that requires E-ZStreet.com, Inc. to go public with the same class of shares held by Josh, Jack and Will or provides that their shares are convertible into the class of shares used to go public.