Full question:
I am the majority owner of an LLC. What is the easiest way to issue something similar to stock options for our employees and contractors? I'd like to set up the options with the following objectives: No tax implications for the employee and contractor until they exercise the option. No voting rights. Performance based vesting/issuance. What other common clauses I should have in the option agreement? Can you send me a template?
- Category: LLC
- Date:
- State: Washington
Answer:
A stock appreciation right (SAR) , is a right to receive a bonus equal to the appreciation in the company's stock over a specified period. SARs benefit the employee with an increase in stock price. The difference from a stock option plan (ESOP) is that the employee is not required to pay the exercise price (as with an employee stock option plan), but rather just receives the amount of the increase in cash or stock. This is normally paid out in cash, but it could be paid in shares. SARs often can be exercised any time after they vest. SARs are often granted in tandem with stock options to help finance the purchase of the options and/or pay tax if any is due upon exercise of the options; these SARs sometimes are called "tandem SARs."
Such bonus plans can be designed in many ways, dealing with issues such as who gets how much, vesting rules, liquidity concerns, restrictions on selling shares (when awards are settled in shares), eligibility, rights to interim distributions of earnings, and rights to participate in corporate governance (if any).
There are special rules in the event that you leave your employer, although generally the expiration is accelerated. The answer will depend on the plan's terms regarding the vesting and expiration of rights. Typically the plan will specify when the rights vest, meaning that
the employee becomes entitled to receive it, and if and for how long any vested or partially vested rights may be exercised upon termination of employment.
Corporations can offer employees certain tax advantage options known as incentive stock options, which LLC's can't. LLC’s do not have an exact equivalent of incentive stock options. However, an LLC can:
• Grant options to purchase LLC units to employees, this has similar tax consequences as granting non-qualified stock options;
• Create a corporate member of an LLC and have that corporate member form a stock option plan and issue stock options to employees of the LLC;
• Create a management LLC entity which becomes a member of the operating LLC, then allocate or grant interests in the management LLC to the employees of the operating LLC; and/or
• Form a phantom type equity plan.
The rules and regulations that govern ESOPs are very complicated, so expert professional accounting and legal advice should be consulted.
Please see the information at the following links:
http://definitions.uslegal.com/v/vesting/
http://www.deckers.com/investors/secText.asp?secTextLink=4926911+%26+doc
=5+%26+num=4
http://www.fdic.gov/regulations/laws/rules/4000-3580.html#tail
This content is for informational purposes only and is not legal advice. Legal statutes mentioned reflect the law at the time the content was written and may no longer be current. Always verify the latest version of the law before relying on it.
