As you know from previous posts in this blog, the choice of entity is a big question for most startups. Whether to form an C Corp, S Corp, LLC, partnership, or something else is one of the earliest — and most important — decisions an entrepreneur confronts.
There are pros and cons to each different structure, of course. In general, LLCs provide tremendous flexibility and tax advantages that are not available to corporations. However, those benefits come with some costs. And one of those costs is that LLCs cannot grant traditional “shares” of stock or “stock options” to employees. However, it is still possible for an LLC to create an employee incentive structure utilizing equity in the company. It just requires some creativity and, not surprisingly, a few extra bucks.
A couple days ago, The Venture Alley posted an excellent article discussing the various ways that an LLC can use equity to incentivize employees. The article covers profits interests, options to purchase profits interests, so-called “phantom stock”, and stock option grants from a corporate member of the LLC. These strategies can be complicated and expensive, but at least they provide the LLC with some options (no pun intended). You can find the article here.