• October 2018
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Is It Common to Have Founder Vesting of Company Units in an LLC?

It varies. LLCs are given broad latitude in structuring vesting terms however they wish as long as they comply with governing rules and regulations. So I wouldn’t say it’s common or uncommon. It simply depends on the organization and what they want to achieve.

With that said, setting up these programs is extremely complex and requires legal and accounting expertise. Many companies makes the mistake of believing they can template or DIY these programs only to learn costly mistakes. We see this often at LawTrades where a startup calls because they didn’t understand that equity sharing works very different between LLCs and traditional C-corps.

For example, LLCs don’t have stock per se. Instead, equity is offered either with a capital interest or profits interest. Capital interests enable an LLC partner to share in both the profits and a portion of the assets, whereas a profits interest entitles a partner solely to a share of the profits. There are some significant differences on return, especially if the company is sold.

For these reasons – and others – founder vesting assumes a variety of forms. If a partner doesn’t invest any substantial capital at the outset, requiring a vesting period is more likely since you want to avoid getting stuck with owing someone a percentage of profits when they didn’t meet their performance objectives. For this reason, partners who don’t financially contribute typically will have interests that are subject to gradual or full vesting after a period of about 3-5 years.

Have more questions? Feel free to visit LawTrades

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