Fundraising · Stock Options

What are the requirements for a stock options to be valid and binding?

Todor Velev Managing Partner, EEI Network

March 10th, 2017

I am working with US based LLC with four classes of stock. Part of the package includes stock options. How can I check that it iit isit is binding and enforceable? Should there be previousprevious shareholders meeting to approto approve a stock options plan and when and how it can be applied? Who should sign the stock options? Am i missing another importante aspectos of a stock options plan?

Isaiah D. Cooper Principal - Cooper Law LLC, providing practical solutions for complex business transactions in New York & Connecticut.

March 10th, 2017

I would want to review the LLC's operating agreement to see how its management is structured. If it is "member-managed" I would want to see written resolutions or minutes from a members' meeting approving the issuance of stock options. If it is "manager-managed" I would want documentation of the election or engagement of the manager or managers, review the approved procedures for this in the operating agreement and want to see written resolutions of the managers or manager minutes approving the stock options. In either case, I think there should have been a stock option plan approved. I would want to review that plan as well. Who has the authority to sign and issue the stock options should be covered in the stock option plan and in the resolutions/minutes.

By the way, I don't use "stock" with LLCs. I use "units" of membership interest to differentiate from corporations, though the terminology is not critical as long as it is provided for in the LLC's operating agreement. I also always structure LLCs as "manager-managed" and add a provision to the Articles of Organization or Certificate of Formation providing that the LLC will be "manager-managed" and that the mangers will have the same authority, rights and responsibilities as the directors would have for a corporation in the same jurisdiction. This is because most of the LLC statutes provide for the possibility of managers, without providing much (or any) detail about their rights, authority or responsibilities.

When I form an LLC which will be raising capital through private placements, I structure it (in the operating agreement) with (1) Founders Units to be issued to the key founders, (2) Investment Units to sell to investors (at a price determined by the Managers), and (3) non-equity incentive interests which can be used to provide employees and consultants contractual rights to a share of profits or of the proceeds from various capital transactions. These incentive interests can be issued with a vesting schedule.

Todor Velev Managing Partner, EEI Network

March 15th, 2017

Thank you, Isaiah, if I understand it correctly, a LLC can have different classes of units, and this should be reflected in the Certificate of Formation.

Thanks to all of you that provided question or suggestions as it alsways help on getting a better understanding of different aspects of the stock options. What is really interesting is that there is no much activity on an issues that suposedly affects most of the people on this forum either as founders that could give options or as employees / advisors / other that can be granted options.

Ron Warshawsky Founder and CEO of Enteros. Years of successful experience in startup business and database technology.

Last updated on March 10th, 2017

If this is for you personally - you need to check your stock options purchase agreement. If you want to validate the stock options allocation validity and other corporate formalities for the company's sake - best is to engage good corporate attorney.


March 10th, 2017

I find that very interesting, since I was not aware of an LLC having any classes of stock. Maybe they have four classes of member units. And, the mention of shareholders seems to be a shift in definition. I suspect that this LLC may be a corporation.

Lauren Schlicht Start-up Veteran WIll take you to Market

March 10th, 2017

As an LLC, the company (officially) does not have stock, so you need to look closely about what it is offering. At some point, most start ups need to go Inc. to raise the funding they are looking for (depending on the market). Are they offering something that converts to stock when they convert from LLC to Inc? Or are they offering some form of 'membership' in the LLC?