Author Topic: Advice on Stock Options in an LLC  (Read 1094 times)

frugally

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Advice on Stock Options in an LLC
« on: July 24, 2015, 04:54:40 PM »
As part of a potential new job opportunity, part of my compensation would be in the form of stock.  Let's say the company (for sake of example) is worth $100 today.  I basically have two options for getting them:

1. Traditional ownership.  I would be granted X% of the company.  This gives me the same rights as other minority owners of the company.  Unfortunately, I would have to pay income taxes this year on whatever X ends up being since this is a grant and not an investment.

2. Some other class of unit created than above.  Basically, they want to create a different class of unit that kicks in above the current valuation of the company ($100).  Once it's established, I would be granted Y% of the value of the business beyond the first $100.  This would help me avoid a large income tax obligation immediately, but I wouldn't have the same type of ownership as existing owners.

I'm not sure what the vesting schedule (if any) for any of this is, nor what the exact numbers would be in either scenario.  I would assume I would receiver a higher % in option two.

Here are my questions:
1. Does anyone have experience with #2?  I've never seen it done in the way being described.  I'm familiar with other things like equity appreciation rights.
2. Assuming there is no vesting schedule (not sure if there is yet or not), is there any way for me to shelter some of that ownership stake in #1 from an immediate income tax liability?
3. Any other comments/questions would be appreciated.

Trirod

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Re: Advice on Stock Options in an LLC
« Reply #1 on: July 24, 2015, 05:39:53 PM »
I'm a CPA and have seen the second scenario quite often.  Usually the options vest on a liquidation event (sale of the company) and the big advantage there is you get taxed on this as long term capital gain (provided you make a Sec. 83(b) election on the grant of the units).

As you say , with the first option you pay tax (at ordinary income rates) on the grant of the units, then annually on your share of flow through income , although the LLC should be making annual distributions to you to pay the taxes.

So which is better?  Impossible to say without knowledge of the number of units offered, future increase in valuation of the company and length of time until a liquidation event. If you want to keep your life simple then the second option is the one to choose.

frugally

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Re: Advice on Stock Options in an LLC
« Reply #2 on: July 24, 2015, 07:25:24 PM »
I'm a CPA and have seen the second scenario quite often.  Usually the options vest on a liquidation event (sale of the company) and the big advantage there is you get taxed on this as long term capital gain (provided you make a Sec. 83(b) election on the grant of the units).

As you say , with the first option you pay tax (at ordinary income rates) on the grant of the units, then annually on your share of flow through income , although the LLC should be making annual distributions to you to pay the taxes.

So which is better?  Impossible to say without knowledge of the number of units offered, future increase in valuation of the company and length of time until a liquidation event. If you want to keep your life simple then the second option is the one to choose.

Thank you.  I wasn't made aware of the options vesting on a liquidation event, but I'll be sure to look at it when they send me the fine print.  That's how things work with my current company.

A follow-up question:
If, for example, the company is going to operate on an EBITDA loss over the next two years, I wouldn't be liable for any income via the LLC after being granted options with the first units, correct?

More than likely, I'll end up going with the second option, but having true ownership stake in the company is something that I'm very interested in from a conceptual perspective.  I can grasp that a lot better than some sort of phantom equity.