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I'm an employee a startup company, and am considering asking for shares or stock or something similar as part of my compensation. The company is an LLC, and I'd like to know what kind of language to use.

I read here that depending on how the LLC is treated, there are certain restrictions on stock options and the like. I'm not sure if my company is such a company, but if it is, what is it that I need to ask for? I'm not even sure right now what a "1244 stock" vs an "incentive stock option" is or what other things might be available. Is there some research I can do (without asking my employer directly) to find out if our company is treated as a partnership?

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    Just FYI, 'stock' would give you actual part-ownership of the company (1244 stock being specially classified small business stock), whereas a stock option would give you the right (option) to purchase stock in the company at a set price in the future. Either at expiry of the option (European option) or between the time you get the option and its expiry (American option). Out of the two, only stock (ie, shares in the company) will give you actual part-ownership. That said, unless you expect the startup to go public or get acquired soon, why do you want stock in it? Mar 1 '11 at 23:52
  • @Timo-Geusch Thanks for the clarification! To answer your question, I expect a buyout sometime within the next 3 years. Mar 2 '11 at 0:33
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"I really want us to succeed and I'm going to work my butt off in order to make that happen. In order to make sure our interests are completely aligned, is there some way that I could receive part of my compensation as equity? I realize this has a higher risk for me since I'd be receiving less cash in the form of salary up front, but I believe in our business and I'm willing to take this risk. I want to make a bet on this company doing extremely well because of the hard work that I'm putting into it."

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  • Thanks, I was more wondering what are the specific types of equity I can ask for - is the generic "equity" good, or is there something specific I should talk about? I want to be educated and precise about what I want and to not ask for something they don't have to offer. Feb 27 '11 at 22:17
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    Generic. For an LLC they would have to give you a share of the LLC and you would have to file taxes in the state of the LLC as well as deal with a K-1 at the year end. LLCs pass through so the profit and loss from an LLC are apportioned to the owners on a percentage basis. It's not impossible for you have some percentage basis but it wouldn't be 'stock'. Feb 27 '11 at 22:24
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    @Shawn J. Goff: Also be aware that an LLC can slice and dice profits, control, and liquidation/buyout rights any way they want, according to the Operating Agreement. These proportions may be very different, e.g. you could have 10% of profits, but 0.1% of a buyout. (This is also possible in a corp with multiple classes of shares.) It isn't clear if you're looking for profit sharing, or liquidation rights, or both. Also beware of an operating agreement that requires you to make a cash investment at some future time or possibly lose your stake. Have your attorney review it before you sign.
    – bstpierre
    Feb 28 '11 at 4:16
  • +1 for the verbiage in the answer. To be picky, your comment should be "LLCs may pass through" -- they can elect corporation treatment with the IRS. Not sure you'd get a K-1 in that case.
    – bstpierre
    Feb 28 '11 at 4:19

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