Stock Options in an LLC
Jeff
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Jeff writes:
I want to start a LLC. My question is if I need people to invest some capital and I want to let them buy into to company with stock options how do I set that up? Does that make sense?
So the short and technical answer to your question is "no" - because LLCs don't have stock. They have a stock-like feature called "units". You can accomplish the same thing with an agreement that gives the option to purchase units in the future, although it's a little different than dealing with traditional stock options, and I'm not sure it would accomplish your goals.
However, the bigger question is why would an investor want an option rather than the stock / units now? Generally speaking, someone who invests dollars into your company is going to want, and likely should receive actual ownership today. Someone who invests time in the company, on the other hand, may be better served with an option such that they don't have to write you a check today.
I have almost no information about your particular situation, but I would suggest that if you are looking to raise outside investment dollars, that you look to issue actual ownership rather than options. It's always a good idea to talk to your accountant when looking at the ramifications of doing an LLC vs. a C-Corp, and to understand the motivations of your investors in that regard as well. Most professional investors are not interested in seeing a pass-through loss they can write off on their taxes, as you could have if you choose partnership style accounting under the LLC. Instead, they'd rather the company accrue the losses to write off against future gains.
But it all depends on your particular situation. If you are expecting to raise a little bit of captial now and grow your business to profitability in short order, then an LLC probably makes sense. However if this is a raise money, get a little further along, look to raise money again to go big type of business, you'd probably be better served with a C-Corp.
Regardless, I can't think of a situation off hand where it makes sense for a cash investor to receive options rather than ownership... actually wait, I can: If you are raising money from a non-professional investor now and expect to raise money from a professional investor later, delaying issuance of ownership (and thus, delaying the selection of a pre-money valuation) can make sense. I have recommended in the past that this be structured as a loan that converts into equity with a bigger round of financing -- something called a convertible note.
I've touched on that concept in a few previous posts here and here.
Whichever structure you choose, best of luck with the new venture!
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