How to compensate consults with equity for an LLC?

Shipeng Fu Founder at Knowledgette

April 22nd, 2014

Background


1.     Formed an LLC in Delaware at the beginning of this year

2.     Early stage b-to-b startup. Currently in the stage of building a pilot.

3.     Have engaged with a potential customer. Received Good feedback; currently negotiating a contract with the potential customer.

4.     Will focus on pilot building in the next few months. Plan to self-fund in the pilot stage. Ideally, we want to raise fund from the customers initially. So in the near future, we are not planning to raise VC/angel money. This is the reason we choose LLC in the first place.

5.     We need to compensate the consultants and advisors in the pilot stage. However, we do not have cash for compensation. We want to compensate the consultants with equity.

 

Question:

 

1.     Should we have a law firm to help us set up the paperwork? If not, where to find available template?

2.     What kind of legal service do we actually need if we do need a law firm? How much does it cost approximately? Which law firm do you recommend for this case?



Many thanks!

 

Kate Hiscox

April 22nd, 2014

Sounds like a grunt fund is perfect for you. Go to slicingpie.com to learn more.

Mike Moyer

April 23rd, 2014

I agree with Kate (above)! I wrote Slicing Pie and it will solve your problem. There are two lawyers on my site who offer Grunt Fund agreement templates and 1-hour consultations for $50. Totally worth it.

-Mike

Manu Chatterjee CEO at Moodwire

April 22nd, 2014

I'd get a lawyer since LLCs typically don't have multiple classes of stock ownership.  Probably worth it just to get your ducks in a row.  Whatever you do be sure to secure work-product rights (e.g. IP and source-code etc) in a formal contract even if that contract is simple and the compensation is for future equity.

Since you're in the bay area, I've had good success with White-Summers (http://white-summers.com/) - ping me directly if you want an intro.

Cheers,
Manu

Tony Daou Entrepreneur, Purchasing Professional, Engineer and Leader with Supply Chain, Manufacturing and Process Eng. experience

April 23rd, 2014

I just came upon this page (http://members.founderdating.com/resources/templates) this morning.  Though seeking a solution through an attorney as suggested by other members is the most secure practice, I would take a quick view of the "template" provided to see if it has a place in your cause.

tonyd 

Scott Milburn Entrepreneurial Senior Executive and Attorney

April 23rd, 2014

Shipeng, the Grunt Fund is indeed a great way to determine what people receive in way of equity when you can't pay market salaries. As Manu suggested, however, there is a challenge in doing it with an LLC. In an LLC everyone who has an ownership interest is a member, usually with each person having a different percentage ownership depending on their contributions (that is where the Grunt Fund comes in). You cannot have different classes of ownership, however, and you cannot grant options that give someone the right to purchase ownership later but do not give them an equity interest now. So, if you give contractors equity in an LLC, they suddenly become members of the LLC and the membership group can grow unwieldy. On the other hand, in a C corp, you can grant stock options or warrants, and the grantees will not become shareholders until such time that it is in their interest to exercise their options (usually when there is a liquidity event). That limits the number of shareholders and can make managing the entity easier.

Mike Moyer

April 23rd, 2014

Equity in an LLC is kind of a weird construct. All that really matters is that people get their fair share of the profits the company generates (if any) or the proceeds of a sale (if any). Other than that the only need for ownership is to impose decision-making power over the organization which can be incorporated into the operating agreement regardless of ownership. LLCs are better for Grunt Funds for this reason. -Mike

Shipeng Fu Founder at Knowledgette

April 23rd, 2014

Thanks everyone!
Kate and Mike, I checked out slicingpie.com. Mike, I also listened to your webinar. Great stuff!
Manu, I will send you a message about the law firm you mentioned. Thanks!
Scott, appreciate your detailed explanation about LLC and C-corp. 

Shipeng Fu Founder at Knowledgette

April 23rd, 2014

Hi Manu, Thank you for the advice. I also appreciate your reminder of securing the work-product rights. I think I need to talk to a lawyer asap. Would you please let me know what is the rate for White-Summers? And do they provide a free consultation for first meeting? Thanks again! -Shipeng

Garet Claborn CEO, Original Author at Approach Corporation

April 27th, 2014

Hi,

In the past, when I've worked with LLC on larger software projects as an engineering consultant, we used Profit Interests. Profit Interests are very similar to ISOs in C Corps and may have vesting rules attached.

Here are a couple links to get you started

Also reading up on the Grunt Fund concept presented on Slicing Pie; new to me, will check it out.