How Does One Structure a Business to Pursue Other Business Lines?

Q:  We’ve developed a web-based security product whose primary application was intended for the financial industry. Since inception we’ve since began pursuing two other business lines, also based on the software, that can be considered conceptually different from the product we initially brought to market.

We’re debating whether we should pursue these product lines under the same LLC or create two separate LLCs and license the software to them, while being majority shareholders in each of the companies. Our concern is that this might be a bit too convoluted a structure for VCs to consider once we go for funding in a couple of months. Alternatively, there’s the liability perspective with regards to having three separate businesses under the same umbrella. I would appreciate your thoughts on this issue.

A:  (Jason)  Your instincts are correct – don’t divide your business among product lines.  Any venture capitalist that invests in your company is going to want to invest in “everything,” not just a product line or two and the complexity and legal costs of setting up all of these entities and having proper licenses for property and people is prohibitive.

From a liability standpoint, one could argue that you are better off dividing up all of your lines of business (if one gets in trouble, it doesn’t hurt the others), but this is mostly a theoretical legal argument.  This argument only holds water if you truly run each business separately, capitalized separately, etc.  It’s not worth the bother.  As a startup, you have more important things to worry about. 

Finally, per our prior post, realize that that VCs don’t normally invest in LLCs. 

  • I would add a couple thoughts to include to your thinking:
    * if you are taking investment in these other potential LOBs (lines of business), these investors may want the books held separately. This is normal in my experience.
    * You need to consider IP issues and assignment in exchange for funding….you lawyer will know but chances are good this will create a new company
    * Run as long as you can under one company to save overhead and max tax deductions due to R&D.
    * If you want to keep the “parent” company to yourselves (i.e. not dilute ownership), the separate companies would be better. For example do you give employees who contribute to other projects shares of the parent company?
    * You also need to consider the exit strategy of the other projects. They may or may not be aligned with the parent.
    This all gets quite complicated…trust me!
    Good luck,
    btw: I am also the CEO and founder of Savant Protection and would love to hear about your web security project. Feel free to look me up at ksteinberg (at) savantprotection (d0t) com.