Internet Venture L.L.C. Desires to Provide Equity Interests to Employe

[Guest McElroy]

An internet venture (in the form of an L.L.C.) is interested in establishing a plan that would provide employees with an equity ownership interest in the entity. I am guessing that this plan would resemble a non-qualified stock option plan and might provide employees with "profits interest". Does anyone have a document that I might be able to review. Thanks. Ed

[pjkoehler]

You say that the objective is to "provide employees with an equity ownership interest in the [LCC]." Why grant them options to buy such interests? You're describing an arrangement that more closely resembles a phantom stock plan that will have to define the basis of measuring the value of the "equity interest" (perhaps an EBIDA-based formula). However, the cost of valuing these interests may make such an approach infeasible. You might want to browse the documents library at the website of the National Association of Stock Plan Professionals at http://www.naspp.com.

[Guest]

This is a highly complex issue. You can grant options on a profits interest in an LLC. You can also grant an option on a capital interest. The tax consequences to both the employee and the other LLC members vary greatly. You will also probably make the employee "self-employed" once he exercises his option. This has collateral consequences. You need two good tax lawyers -- a compensation and benefits tax lawyer and a good partnership tax lawyer. This is not a "do-it-yourself" project.

[Kirk Maldonado]

I wholeheartedly agree with Harry O. In fact, there is a low of disagreeement among tax and benefits attorneys on what works and what doesn't work in this arcane area.

[IRC401]

I agree with Kirk and Harry O. I drafted a non-qualified option agreement for a "dot.com" start-up earlier this year only to have the client decide to become a C corp because the tax advantages of being an LLC were more than outweighed by the aggrevations. I spent a lot of time coordinating with the corporate attorney (and explaining tax rules to him).