Wired 45k into a friend's storage expansion for four percent and no distributions

The overrun size is the part I'd flag for anyone reading. 148k on 640k is 23 percent, and a construction budget with no contingency line is not a budget, it's a hope. On the deals I look at now I want to see 8 to 12 percent contingency on a ground-up or expansion, held at the project level and named as such, plus a statement of who funds an overrun beyond it.

The 2x penalty on funded capital isn't unusual in small sponsor-led deals and it isn't hidden malice. It exists so the person who shows up with cash in a crisis gets rewarded. But it means your 45k was never really 45k for 9 percent. It was 45k for 9 percent conditional on you having more money available later, and nobody said that sentence out loud.

@plumb did the amendment give you any preemptive right, meaning a right to fund your pro rata share of new equity before outsiders come in? Sometimes the same section that dilutes you also protects you, and people miss both halves.

The mechanism worth understanding here is the difference between pro rata dilution and punitive dilution, because they produce very different outcomes from the same failure to fund.

Under straight pro rata dilution, if the LLC raises additional capital and you don't participate, your percentage falls in proportion to the new money. If total contributed capital goes from 500k to 650k and you contributed 45k and nothing more, your share moves from 9 percent to about 6.9 percent. Arithmetic, no penalty.

Under a punitive or multiplier provision like the one @plumb describes, contributions from members who do fund the call are credited at some multiple, commonly 1.5x or 2x, when the new percentages are computed. That's why 9 went to 4.1 rather than 6.9. The multiple is a negotiated term, and it varies deal to deal. Some agreements instead treat unfunded amounts as a loan from the funding members at a high rate, which leaves your percentage alone but subordinates you in the distribution waterfall until it's repaid. Neither is inherently improper. They are different allocations of risk between the person with liquidity and the person without.

Three things determine whether this bites you. Whether the agreement allows discretionary capital calls at all, or only for defined purposes. Whether there's a cap on the total amount that can be called. And what the treatment is for a non-funding member. Those provisions usually sit within a page or two of each other.

Whether a given interest is also a security, and what that means for how it can be sold to you, depends on facts and on state and federal law, and that's a question for a securities attorney rather than a forum. The general point stands regardless: the capital call and dilution language sets your downside more than the projected returns do.

The clauses I'd read first, in order, in any small LLC subscription like this:

Additional capital contributions. Does it say members may be required, or may be requested? Required plus a remedy for non-payment is where the 2x lives.

Remedies for failure to contribute. This is usually its own subsection and it will spell out dilution formula, loan treatment, or forfeiture. Read the formula with your own number plugged in. Do the arithmetic on paper.

Major decisions and manager authority. Can the manager approve a change order, a budget increase, or additional debt alone? If yes, the capital call was always his to trigger.

Distributions waterfall, specifically whether there's a preferred return and whether it accrues while unpaid. @plumb, three years of zero distributions might mean an accruing pref is stacking up ahead of you, or it might mean nothing is accruing at all and those years are gone. Those are wildly different outcomes and the answer is in one paragraph of your document.

Transfer restrictions and any buy-sell. If you ever want out of 4.1 percent, that section decides whether you can.

The document did what it said. That's the part people find hardest to accept.

This is exactly the scenario that keeps me in analysis mode instead of writing checks. Thank you for posting it with the actual sections named, because "read the docs" is useless advice and "read section 4.3 and do the arithmetic with your own number" is not.

Does the friendship part make it worse or better? Genuinely asking. I think knowing the guy 15 years is what made you skim 34 pages, and a stranger sending you the same document would have made you slow down. The trust substituted for the diligence.

Operator side. A 22 percent overrun on a metal building package right now is not a scandal, it's Tuesday. Steel and door pricing has moved on me twice mid-project and suppliers won't hold a quote for six months anymore. Anyone budgeting off a stale bid on a storage expansion is going to get the same result your friend got.

Where I'd put the fault is the missing contingency and the 6 month lease-up. 60 climate units in 6 months is 10 move-ins a month of purely new demand on top of whatever the existing 210 units absorb. Even with a waiting list, waiting lists convert at maybe half of what people expect once there's an actual price attached. 14 months sounds about right to me and should have been the base case.

@plumb did he show you the lease-up schedule before you wired, or just the stabilized number?

The formula is worth writing out because people assume dilution is dilution.

Say contributed capital was 500k pre-call, your 45k inside it. Call raises 148k, all from others. Straight pro rata puts you at 45 over 648, about 6.9 percent. With funded capital counted at 2x for contributors, the denominator becomes something closer to 45 plus 2 times 603 plus 2 times 148, and you land right about where @plumb landed. The multiplier does most of the damage, not the size of the raise.

One more thing. LLC statutes have default rules for capital contributions and remedies, and those defaults differ by state, but a written operating agreement usually overrides them. So the document is the deal. Whether any particular provision is enforceable as written is a question for an attorney in the state of formation.

The line I'm taking from this is asking what happens if I can't fund a future call, out loud, in the room, before money moves. Costs nothing to ask.

The people who read my contract carefully are the ones I never have a problem with later. Running a business for five years taught me the same lesson from the other side.