Venture Capital: Road to the Neopets Stock Market

     This memorandum will address the Operating Agreement for Alien Aisha Vending and Virtupets’ joint venture LLC, as prepared by Virtupets’ counsel. It will specifically address deviations from Alien Aisha Vending and Virtupets’ meetings.

     Facts: Farvin and Sophix ("Alien Aisha Vending") met with Virtupets, Corp. ("Virtupets"), to discuss their joint venture. Virtupets presented Alien Aisha Vending with a draft of the definitive documents. In previous meetings, Alien Aisha Vending informed us that Alien Aisha Vending would contribute all of its software technology in exchange for 35% of the equity in the joint venture. Virtupets will contribute 12 million in Neopoints, engineers to refine the features of Alien Aisha Vending’s Nerkmid technology, and marketing and sales personnel. Virtupets will have 65% of the equity, and there will be no other members of the joint venture. Virtupets will appoint three managers, and Alien Aisha Vending will appoint two (Farvin and Sophix). Alien Aisha Vending is concerned about its role in management and whether Virtupets will treat it fairly. Although the equity will not be evenly split, Virtupets has stated that it will not take actions detrimental to Alien Aisha Vending without Alien Aisha Vending’s consent.

     Discussion: The front page of the Agreement states that the Company is a Neopia Central Limited Liability Company, while Article I states that the Articles of Organization will be filed in Virtupets Space Station. This discrepancy should be addressed.

     Article I states that the Initial Members will be Alien Aisha Vending and Virtupets, and Additional Members may be admitted by Managers. However, this appears to be contradicted in Article XI, where Virtupets is listed as Member and Manager, Dr. Sloth as Member and Manager, and Alien Aisha Vending as Member. This is also contrary to the information that Alien Aisha Vending has described—specifically that there will be no other members of the joint venture. No information about Dr. Sloth’s role has been given to Alien Aisha Vending, nor is there information available in the Operating Agreement about Dr. Sloth and their role.

     Schedule II shows that the contribution differs from what Alien Aisha Vending understood it would be. Instead of Virtupets contributing 12 million NP, instead they will contribute 10 million NP. Dr. Sloth will contribution 5 million NP, and Alien Aisha Vending will contribute 500,000 NP. The Agreement does not state anything about Virtupets providing engineers, marketing, and sales personnel. In addition, Virtupets will have a 60% company interest, Dr. Sloth a 20% interest, and Alien Aisha Vending a 20% interest. Alien Aisha Vending contributing 500,000 NP was also not part of their previous discussions.

     Article I, 1.3 states that the principal business of the Company “will be the development of Dr. Sloth’s next business enterprise.” The Operating Agreement lacks information about how many managers Alien Aisha Vending and Virtupets can appoint. Although Alien Aisha Vending believes that they will appoint two managers (Farvin and Sophix) and Virtupets will appoint three managers, this information is not stated in the Operating Agreement. Article XI also contradicts this, with Virtupets and Dr. Sloth being listed as Member and Manager, but Alien Aisha Vending only as Member. From this, it appears possible that Alien Aisha Vending will not have the power to appoint any Managers. The Operating Agreement also makes it appear unlikely that Virtupets will treat Alien Aisha Vending fairly, with Virtupets having the majority of the power to make decisions.

     Although Virtupets has stated that it will not take actions that would be detrimental to Alien Aisha Vending, Article V (Management and Voting) makes it a possibility. Managers have the power to sell, assign, transfer, or dispose of any or all of the assets of the Company under 5.1 (v), and cause the company to merge, liquidate, dissolve, reorganize, or recapitalize under (vi). In addition, Members do not have the power to remove the Managers at any time, with or without cause, under 5.1 (c). Since Virtupets-appointed Managers are explicitly given more power, it is unclear what Alien Aisha Vending Managers will be able to do.

     5.2’s Required Approvals are also biased towards Virtupets, stating numerous actions that the Company cannot take without the affirmative vote of the Managers appointed by Virtupets. Most of these will be concerning to Alien Aisha Vending, but the ones that are important to note to Alien Aisha Vending would be: (a) and (b), which both concern employment and termination of officers and executives in the Company, (f) approval, adoption or modification of any operating of financial budget of the Company, (u) making material changes to the Company’s business, and (y), which requires “any amendment to the Company’s Articles of Organization or this Agreement” to have the affirmative vote of Managers appointed by Virtupets.

     If this Agreement is signed, it seems it would be very difficult for Alien Aisha Vending to change any portions of the Agreement, especially since it is unclear whether or not they have power to appoint Managers. However, even if Alien Aisha Vending could appoint two Managers, Virtupets would still have three Managers (if this followed their initial conversations), so Virtupets Managers would still be in the majority.

     It is further stated in Article XI, 11.5 that "Any amendments to this Agreement shall require the consent of (a) the Managers and (b) Members holding a majority of all Company Interests". This further points to the fact that Alien Aisha Vending will not be able to amend the Agreement.

     Virtupets is specifically mentioned in many of these actions of Article V, as having an exception, such as in (m). From these approvals, it is clear that Alien Aisha Vending’s authority is very limited, and changes must have the affirmative vote of Managers appointed by Virtupets, but Virtupets does not have these same restrictions in place.

     According to 5.3, as long as Virtupets maintains equity interest of 15%, there are further restrictions on the Company’s actions. Several actions are then listed, that the Company shall not do without the vote or written consent of Virtupets. 5.3 (d) – (f) are extremely restricting to Alien Aisha Vending. Alien Aisha Vending would not be able to alter or repeal any provision of the Agreement, liquidate/dissolve the Company, or make any material change to the Company’s business as long as Virtupets maintains an equity interest of 15% or more in the Company. Considering that Virtupets has a 60% interest and all the restrictions stated in Article V, it is unlikely that Virtupets’ interest will fall below 15%.

     The current Agreement leaves Alien Aisha Vending with little power, and it looks like Virtupets is only interested in Sophix and Farvin’s software technology for their own purposes. Dr. Sloth was also not previously discussed, but they will be a third Member. Dr. Sloth’s role in the Company will have to be clarified, and Alien Aisha Vending will have to decide whether or not they are open to having a third Member. However, this Agreement has shown that Virtupets intends to renege on some of their previous conversations, especially with the addition of the statement that the Agreement supersedes any prior written or oral agreement or negotiation that the parties had.

     Alien Aisha Vending is rightfully concerned about Virtupets’ ability to treat them fairly and Alien Aisha Vending’s role in management. It is currently unclear how many Managers Alien Aisha Vending and Virtupets can appoint, and if Alien Aisha Vending can appoint Managers at all. If they cannot, then they would have no power in the Company’s decision-making process. Alien Aisha Vending should propose removing all of the restrictions on amending the Agreement, specifically that approval of Virtupets managers is necessary.

     Due to the fact that the Operating Agreement contradicts many of the prior conversations, Alien Aisha Vending should negotiate for the initial agreed upon 35% company interest, or higher. Even with a 35% company interest, Alien Aisha Vending would be left relatively powerless if the provisions that require approval by Virtupets-appointed Managers is not removed.

     Currently, Managers also have broad discretion and do not need approval from Members to make decisions. Depending on if Alien Aisha Vending can negotiate to have an equal number of Managers or not, I would recommend curtailing the management powers, or having decisions greater than a certain monetary amount and ones that would dissolve the Company require Member approval.

     Conclusion: If signed, this Agreement would be binding on Alien Aisha Vending, with little possibility of Alien Aisha Vending being able to later amend the Agreement. The information in the Agreement appears to be contrary to what Alien Aisha Vending discussed with Virtupets prior. Virtupets would hold the majority of the equity in the joint venture.

     Winston felt confident Lawyerbot approved of his thorough work uncovering all the problems of the agreement and looked forward to the upcoming meetings in which Sophix and Farvin would surely appreciate the firm’s words of caution and act accordingly to avoid major problems with the joint venture.

     To be continued…