Apr 3, 2014
How to create a vesting schedule for an LLC?
I've recently partnered with some individuals in a business venture and we've all agreed we want a vesting schedule for equity in the company. Meaning when one of us works less then our share goes down, whereas when one of us works as we should our share goes up. If any of your know of where I could get a template or something like that, it would be much appreciated! I just want to understand what it would look like to see how or if we could incorporate it.
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Apr 4, 2014
The difficulty as I see it is that each situation is so unique that, even if one of us were to provide a model vesting schedule, it may not apply to your business. Your particular business has to be examined in regard to the schedule. Is all work to be performed in a specific place? If not, how will time spent be accounted for (i.e., a time clock, the honor system, etc.)? Does just being on premises constitute work? What of one of you believes that someone is on premises but not working? Will the vesting schedule be based on hours worked, tasks performed, revenue brought in to the business or in some other way? This is the time that you need good legal advice particular to your situation. When you are walking down the aisle, you think that the marriage will last forever. As we know, that is not always true. Now is the time you need to design a good business pre-nup - and you should have a third party, such as an attorney, do just that. It is a lot less expensive to draft the agreement now than to battle through litigation later.
Apr 3, 2014
If you are going to have a fairly large business then I would seek a lawyer to have them write one up for you. The issue with creating one yourself is that they can easily be disputed because you are not familiar with all the technicalities. If your business is looking at a large amount of profit, money often times out weighs friendship and problems arise which means legal disputes. I know it can cost a fair amount to get a lawyer, but it's worth it just in case problems come up in the future which is always a possibility.
Apr 4, 2014
A template would be vastly insufficeint for what you need. Unless you are an experienced business attorney, I strongly recommend that you speak with one. Trying to save a few pennies on your legal work is a very bad idea especially with partner/shareholder issues. If for example, there is a dispute, the company and the disputing owners can each reasonably expect to pay tens if not hundreds of thousands of dollars in legal fees, even if your company is small. If you cannot afford a business attorney, you cannot afford to be in business. There is a very old saying that goes "A man who is his own lawyer has a fool for a client". If you are serious about your business, you will take that to heart.
Apr 4, 2014
Wow is this a loaded question. I just don't know where to start. I think the best thing I can do for you is to ask you some questions.
1. Do you have a partnership agreement with all of your Venture Capitalists?
2. Do you have a responsibility that each party will bring to the table documented in the partnership agreement?
3. Is each vested interested party giving you equal amounts of money?
4. Are there five or more parties involved in the investment?
5. What kind of collateral are you giving the vested parties?
6. Do you have a pay-back schedule?
7. Does interest fall into the payback?
8. Do you have a loan agreement within the partnership with every investor?
9. Do you have a promissory note within the partnership agreement?
10. Do you have a non-circumvent and non-disclosure and non-compete and confidentiality agreement above and beyond the partnership agreement with each partner?
11. Do you have a clause in your agreement if one investor backs out the others have the right to buy out their shares of ownership?
12. Do you have to have a lot of capital to get this thing started to give up so much?
13. Have you researched SEC guidelines for using other peoples money in your investment and the Federal and State laws that govern this type of invewsting?
14. Do you have an attorney?
15. Do you have an accountant?
16. Do you have a CPA?
17. Do you have a third party escrow holding company to manage everyone's money so you can keep your hands clean from the money?
18. Do you have governing rule or shared rule as to how the money is spent?
19. How many signors is on the account and who holds that account?
20. Do you have a business plan outlining your roadtrip?
Are you getting my message? Money can build relationships but it can break businesses. Which side of the fence are you on to protect the money investors?
Apr 4, 2014
1. So far there are no venture capitalists, just the 3 partners and myself, investing our own money.
2. We are still forming the operating agreement (which is what we need the vesting schedule for).
3. No, each vested party is not giving equal amounts of money, but others are supplementing money with work, hence the need for a vesting schedule.
4. Only 3 parties involved.
5. There is no collateral provided as of yet. This is a good suggestion and I will look to implement it. Thank you!
6 & 7. No and I don't understand how interest plays into our business model yet.
8. No.
9. No.
10. No.
11. Yes.
12. Yes.
13. A bit. We are all using our own money and are all considered members and managers of the LLC so I did not consider this to be an issue according to the SEC guidelines. Am I wrong?
14. Working on it.
15. Yes
16. Difference between accountant and Certified Personal Accountant?
17. No.
18. Yes.
19. 3, the business.
20. Yes.
Thank you Jinean!
Apr 4, 2014
Stephen: Have you researched on line for examples of vesting schedules? This is not that arcane a subject that you can't find something on the web. Typical vesting schedules are based on time, though you could base them on hours worked. The idea of shares going up is not a good approach. You should get the maximum shares at the outset, with vesting resulting in a decrease of shares.
Apr 4, 2014
Thanks John! That's exactly the type of answer I needed. I will consult legal council in this regard, but I appreciate your answer as it sets me on the right track!
Apr 5, 2014
Stephen, vesting of equity in the sense that the lapse of time or meeting certain thresholds triggers the issuance of additional equity, or conversely, reverse vesting mechanisms whereby the failure to meet certain thresholds triggers a take back of equity previously issued, are subject to local corporate law limitations. In some jurisdictions, company buy back or redemption of equity may be impermissible. Another mechanism which I have used before is through the mutual grant of call optionswhich are triggered by early termination of work over time. However you should note that all of these mechanisms, depending on jurisdiction, may also have tax implications. Another good reason to work with local counsel on this...
Apr 6, 2014
Hey Sharon,
Assuming that I am setting all of this up locally- and obviously this isn't legal council from you I understand, and in no way do I construe it as such- but would this: http://legislature.idaho.gov/idstat/Title30/T30CH6.htm
be the "local corporate law" you were referring to? I have every intention of seeking local counsel I just very much want to know what it is I'm asking for, what it is I'm receiving. I don't like walking in "ignorant" and saying "Hi, I want a 'vesting schedule'!"- oblivious to the time and effort that goes into creating one.
Apr 6, 2014
If you are looking to set this up as an Idaho LLC then yes, that would be your governing law on corporate aspects of the arrangements.
Apr 9, 2014
Stephen, There are a few ways to set up a vesting schedule. One is time,another is milestone, a third is "contribution" or results. Using just the "number of hours" worked may seem the easiest - but since it assumes all hours are the same and equally productive could lead to serious conflict in the future.
Regardless of the method(s) you choose- I strongly recommend working with an attorney to complete the documents because you really need more than just this one.
if you would like to discuss your situation in more detail, or would like a referral to an attorney -feel free to contact me directly. robert@ bizgrowthmasters.com
Good luck.
Apr 11, 2014
Hey Robert!
I appreciate your insight. I would ask, if not hours, what would you recommend as the safest form of measurement. Milestones?
Apr 9, 2014
I am not familiar with the details of your LLC, but I would venture to say that a vesting schedule is NOT a solution for equity in a company? Because of the laws that govern an LLC and the way it is set up, there are not enough parameters to ensure fairness in the partnership. For example, if you have 4 partners investiing their own money and one partner invests more money that the others, does that entitle him to more of the company? it turns into a nightmare that cause bad blood amongst friends/partners.
Hey Joseph,
I appreciate that, but the thing is, we're really just starting up. Consulting a lawyer at this point seems a bit superfluous, but perhaps I'm overlooking the value...