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How do you pay someone in equity when you are an LLC?

San Francisco, CA |

Do you do it just like if you were to hire an independent contractor? Or do you have to adjust the operating agreement?

Attorney Answers 6


Equity compensation in an LLC is extremely complicated. You will need an attorney and possibly an accountant to advise you. The options include profits interests, phantom interests, equity appreciation rights, membership interests, so on. To give you an idea of the complexity and options, read this

Please speak with a tax attorney or business attorney with expert understanding of LLC equity to advise you and draft the required documents. Good luck.

This answer is for informational purposes only and is not legal advice regarding your question and does not establish an attorney-client relationship.

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It is not the same at all. Issuing securities is very strictly regulated. Valuing securities is very complicated, and it is an important issue for taxes, etc.

The above is general legal and business analysis. It is not "legal advice" but analysis, and different lawyers may analyse this matter differently, especially if there are additional facts not reflected in the question. I am not your attorney until retained by a written retainer agreement signed by both of us. I am only licensed in California. See also terms and conditions item 9, incorporated as if it was reprinted here.

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I would avoid issuing equity if at all possible. Perhaps in your case, you can utilize a "pay-for-performance" agreement instead of offering interest.

At the very least, you should reach out to several lawyers and discuss in more detail to get a sense of what would be recommended in your particular case.

If you do end issuing equity, in the LLC context you need to make certain the operating agreement addresses your membership properly and that you have considered operating with multiple members and thought about buy-sell terms, exit strategies, dispute resolution, among many other provisions. Further, the paper vehicle that brings in the other member is called a subscription agreement and it too can be more or less involved case depending.

Most of us here, including myself, offer a free phone consult.

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I agree with my colleagues that this is not a DIY project. Furthermore, one would need more details to understand precisely what your requirements are.

That said, to answer the last part of your question: Yes, if a new member is added, the Operating Agreement must be amended accordingly.

This information does not constitute legal advice and does not establish an attorney-client relationship.

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Typically, you have to amend your operating agreement to reflect the reserve of equity for such purposes. You also need consents from the other members to allow such recipients to become members of the LLC in addition to the plan that comports with federal and state regulations pertaining to the award of equity to contractors/employees/founders, etc. unless your grant agreement addresses these concerns. There are about 100 different ways to do this, and it mainly depends upon your current structure, and the flexibility you'll have with your existing members to get this done.

For legal advice and representation, consult an attorney. This response was provided for informational and marketing purposes only, and should not be relied upon as legal advice. No communication with the author of this comment through this website can establish an attorney-client relationship, as the attorney-client relationship can only be established by the mutual understanding of its creation by both the client and the attorney, each party intending to create such a relationship.

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An LLC can use a phantom (or shadow) equity performance plan using certain amounts of units that are either equal to the membership interests, company growth in value or performance, or any other indicator of company value you can think of, although it is always best to use an easy and very conservative indicator. Such performance incentives are not considered equity, for example, if you provide a 1% of the cash flow of revenue - expenses as a performance incentive this is not equity. If you provide an incentive based on value of the company at different time, i.e. 1% of the increase in value of the company, if any, on Jan. 1 of every year measured using (insert accounting and measurement description), this is also not considered equity. When using both together you are getting much closer, however, it is possible depending on your jurisdiction.

Regardless you should have a competent attorney handle this as if you are providing equity there are many issues and if you are using a phantom stock plan (aka shadow equity) you can run into serious problems if you get the valuation for performance wrong.

The information and materials are provided for general informational, educational and theoretical, purposes only and is not intended to be legal advice and may not be relied on as legal advice and does not create an attorney-client relationship. Bottom line is hire an attorney.

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