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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 ----------------------------------------------------------------------*** FOR MORE INFORMATION ON THE PENDING COMBINATION OF SONNENSCHEIN AND DENTON WILDE SAPTE LLP, PLEASE VISIT WWW.SNRDENTONCOMBINATION.COM *** CONFIDENTIALITY NOTE: This e-mail and any attachments are confidential and may be protected by legal privilege. If you are not the intended recipient, be aware that any disclosure, copying, distribution or use of this e-mail or any attachment is prohibited. If you have received this e-mail in error, please notify us immediately by returning it to the sender and delete this copy from your system. Thank you for your cooperation. IRS CIRCULAR 230 NOTICE: To comply with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained herein (including any attachments), unless specifically stated otherwise, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending any transaction or matter addressed herein to another party. ----------------------------------------------------------------------- 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] This e-mail is protected by the Attorney-Client Privilege and Attorney Work Product Rule 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 This e-mail message and any attached files are confidential and are intended solely for the use of the addressee(s) named above. This communication may contain material protected by attorney-client, work product, or other privileges. If you are not the intended recipient or person responsible for delivering this confidential communication to the intended recipient, you have received this communication in error, and any review, use, dissemination, forwarding, printing, copying, or other distribution of this e-mail message and any attached files is strictly prohibited. Joseph D. Carney & Associates LLC reserves the right to monitor any communication that is created, received, or sent on its network. If you have received this confidential communication in error, please notify the sender immediately by reply e-mail message and permanently delete the original message. IRS Circular 230 Disclosure: Unless specified otherwise in this message. to ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.