Basic Training: M is for When ‘Member’ Shouldn’t Mean ‘Owner’

By Nina Kaufman, Esq.

People are getting smart about creating communities online. If you can get people to join, and you provide a benefit at a reasonable cost, chances are you’ll be on your way to building a nice annuity stream. The problem comes (as it does in other kinds of businesses) when the founders want to “sweeten the pot” by offering miniscule ownership interests in the company. I don’t recommend it, and I’ll explain why:

Q.: My business sells memberships. There is a lifetime membership option available that is rather expensive, but I thought that if I included one share of the business in this option, it might make it more appealing. Can I include a share of the business in one of the membership types and is this legal?

A.: This can be done legally, but you run into more complications than it’s worth. Not a great way to go. First, unless you have a locked-in, airtight plan to go public (or have a horde of dedicated followers to the “cause”), the dollar value of your one share will probably not be significant enough to entice people to “buy.” You can’t trade it on the open market. There will probably be restrictions on how and to whom it can be sold. Sure, your members will have a slip of paper saying they own a piece of the company . . . but so what? It doesn’t (and shouldn’t) give them a say in what’s going on.

Second, unless you plan your stock issuance carefully, you could run out of stock to give. If you have 100 shares of stock and want to give one to each lifetime membership purchaser, you’ll lose control of your company if more than 49 sign up for the membership. You don’t want the inmates running the asylum.

Finally, if the members will not actively participate in running the company, they would be considered investors under the securities law . . . in which case you’d want to have a host of securities disclosures and documents for them to sign. This can get extremely expensive when it comes to legal fees.

Better to consider other “sweeteners,” such as exclusive opportunities to hobnob with bigwigs, special offers only to big spenders, etc. And make sure you price that lifetime membership high enough that you don’t wish the member would drop dead yesterday.

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