Debate: LLC Profits Interests as an Equity Compensation Vehicle for Startups

Profits Interests: Is a Stock Option by any other name still the same?

We at The Burrell Law Firm have been investigating the utility of advising startup clients, whose business is setup as an LLC, as to whether “profits interests” would be an effective compensation vehicle for service providers to the startup.

Profits interests in relation to an LLC startup appear to be analogous to stock option grants in relation to a corporation. An useful explanation of profits interests can be found here.

Profits interests could be a way for a startup to offer equity compensation in the early days of operation, but it seems startups expecting to enter into Series A fundraising may want to limit the number of persons or entities to whom profits interests are offered prior to the startup converting into a c-corporation because of the potentially costly administrative headache.