Download Option on Membership

From: Private Equity and Venture Capital Committee [mailto:[email protected]] On Behalf
Of Rosenthal, Michael D.
Sent: Thursday, August 05, 2010 4:36 PM
To: [email protected]
Subject: Re: Option on Membership Units of LLC; later VC Investment with conversion to Corporation
An alternative is to grant a profits interest, which upon conversion of the LLC into a C Corp. will be
converted into an option to purchase Common Stock in the C Corp., with the strike price to be based
upon the FMV per unit which was used in structuring the profits interest. Drafting the formula can be a
little tricky depending on the terms of the LLC Agreement.
Michael D. Rosenthal
Sonnenschein Nath & Rosenthal LLP
Direct: 312.876.3180
Cell: 312.543.9457
Fax: 312.876.7934
[email protected]
www.sonnenschein.com
233 S. Wacker Drive
Suite 7800
Chicago, IL 60606-6404
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From: Private Equity and Venture Capital Committee [mailto:[email protected]] On Behalf
Of Straughan, Ben (Perkins Coie)
Sent: Thursday, August 05, 2010 2:03 PM
To: [email protected]
Subject: Re: Option on Membership Units of LLC; later VC Investment with conversion to Corporation
Joseph - As an emerging co attorney I have not been very satisfied with llc option plans to date, as they
remain more complicated and generally more costly and present more administrative issues than a
corporate option plan. If you only intend to make these two relatively substantial grants to these two
persons you can create and grant a profits interest - an actual membership interest in the profits of the
company going forward. This works well for tax purposes by maximizing the chance for capital gain for
the holders, but also requires an amendment to the operating agreement and creates a separate class of
equity that requires separate valuation when the company converts to a corp. Alternatively, you can
simply list the right to an option in the offer letter, with the note a. they'll be granted when the corp is
formed, b. at the FMV at that time and c. subject to board approval. This reduces costs and simplifies
greatly, but presents a less favorable opportunity for the execs. Eventually the llc option plans will catch
up with the corporate ones!
Best
Ben
Ben Straughan | Perkins Coie
LLP
1201 Third Avenue, Suite 4800
Seattle, WA 98101-3099
PHONE: 206.359.3333
FAX: 206.359.4333
CELL: 206.799.2323
E-MAIL: [email protected]
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unless addressed to a non-client.
From: Private Equity and Venture Capital Committee [mailto:[email protected]] On Behalf
Of Joseph D. Carney
Sent: Thursday, August 05, 2010 8:58 AM
To: [email protected]
Subject: Option on Membership Units of LLC; later VC Investment with conversion to Corporation
Growing LLC with potential VC Investor (who will likely convert it to C corp) wants to provide options on
membership units of significant amounts e.g. 4-5% of entity to two senior key officers.
If the VC comes in, because of contracts at LLC level, will likely form C Corp and contribute all of the LLC
interests to create LLC single member subsidiary of new C corp vs merge.
I am creating the Options for these Officers and the stick price would be fair market value with vesting
schedule, etc. Any suggestion for these terms or links to blogs or forms appreciated as to what is
typical/market for non founder senior officers?
When the formation of the C Corp occurs and contribution occurs I want the officers to have stock options
vs Options on Units and I am thinking they contribute the options to the C Corp in exchange for Options
on Stock of similar tenor? Any view on 351 character of that contribution or other issue on how I might
change options on membership units to options on stock without recognition event?
Thanks to all.
Joseph D. Carney, Esq,
[email protected]
Joseph D. Carney & Associates, LLC
www.jcarneylegal.com
2001 Crocker Road | Suite 530
Westlake, OH 44145
(p) 440.249.0850 | (f) 866.270.1221
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