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Richard - Bizlaw
Richard - Bizlaw, Attorney
Category: Business Law
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Experience:  30 years of corporate, litigation and international law
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I am looking for advice in putting together a vesting agreement

Resolved Question:

I am looking for advice in putting together a vesting agreement for bringing on a new partner into my LLC that is currently a partnership filing as a pass through entity in California.

The following is a chart I have put together as a starting point for vesting this partner into our firm. I'm wondering the implications of making such an agreement vis a vis our LLC partnership status and what we must do to account for the vesting. Does anything need to change until the 1 year cliff is reached? Also, since this new member cannot get health insurance under our group policy at a favorable price until he is on the legal documents as a part owner, there seems to be a conflict of approaches therein. The following is a chart I had drawn up. The top half is the standard unaccelerated vesting structure and the bottom half is with 6 acceleration triggers that, if met, would mean the new partner could vest before the 1 year cliff.

Is this start completely off the mark? What am I perhaps not taking into account? Thanks for your guidance.

Vesting Structure -- Without Meeting Triggers to Accelerate
End of Year 1 -- Option to buy 10% of company @ $7,500-$10,000
End of Year 2 -- Option to buy additional 7.5% at $7,500-$10,000 (total vested = 17.5%)
End of Year 3 -- Option to buy additional 7.5% at $7,500-$10,000 (total vested = 25%)

Triggers to Accelerate Dom's Vesting
1) Total Sales in 1 Quarter = $250,000
2) 10 Dealer Agreements in Place
3) Completed/Updated Business Plan & Operating Agreement
4) Total Equipment Sales in 1 Quarter of $75,000
5) Health Insurance in Place for All 3 of Us
6) Buy/Sell Insurance Policy in Place to Protect Company

If These 6 Triggers are Met, Dominic Can Vest his 1st 10% Before 1 Year
Quarterly Vesting in Place After First 10% is Vested

Input appreciated!

Jason
Submitted: 3 years ago.
Category: Business Law
Expert:  Richard - Bizlaw replied 3 years ago.

bizlaw :

tt

Customer:

Hello? TT?

bizlaw :

Did you have another question? Did you see my complete response not just the inadvertent tt entry?

Customer:

No, all I saw was the tt!

bizlaw :

What I wrote was that the vesting should work off a buy back rather than contuous purchases. You sell all the interest he can get 1/3 in cash and two thirds in two notes that are due in one and two years respectively. If the standards for vesting are not met, you buy back the interest by cancelling the note. This makes the accounting much simpler. Also, normally your vesting standards are based on performance standards. Things like the Operating Agreement and Business plan should be in place early on unless the person is to prepare a business plan. The operating agreement needs to be in place at the beginning. Similarly, the health insurance should not be a vesting standard.


If this answer is responsive to your question, please accept it. That is how we are compensated. I would also be appreciated if you provided feed back on your view of the answer. Finally, if the answer was especially helpful you can provide a bonus. If I can be of further assistance or you have other questions in the future you can ask for me and reach me at this site.


This communication is not intended as legal advice. A local attorney should always be consulted for legal advice. No client/attorney relationship is intended or created by this communication.


 

Customer:

Ok, I'm a bit confused, sorry this terminology is new to me...

bizlaw :

What do you not understand?

Customer:

You sell all the interest he can get 1/3 in cash and two thirds in two notes that are due...

Customer:

Maybe the sentence structure confused me, and I read it wrong...

Customer:

He gets cash?

bizlaw :

Under your formula, he bout 10% for $7,500 in the first year - I see that purchase was at the end of the year. At the end of yr 2 he bought another 7.5% and the end of the third year 7.5% to get his full owntership. What I propose is that he gets 25% all at once for three notes due at the end of each of the first three years. If he does not perform you buy back his interest at cost. You can buy back 10% by cancelling the note and taking back the interest and so on for each year. What this does is determines his interest at the outset. As the company operates, its worth may go up each year and then you would have to account for selling the interest for less than it true worth. Doing the transfer at once you avoid this problem. That should clarify how it works.


If this answer is responsive to your question, please accept it. That is how we are compensated. I would also be appreciated if you provided feed back on your view of the answer. Finally, if the answer was especially helpful you can provide a bonus. If I can be of further assistance or you have other questions in the future you can ask for me and reach me at this site.


This communication is not intended as legal advice. A local attorney should always be consulted for legal advice. No client/attorney relationship is intended or created by this communication.

Customer:

Ok, I understand more clearly... but he has not been vested at all yet...

Customer:

We are trying to make an agreement so that retroactive from April 1 2011, on April 1 2012 he would be entitled to his first 10% chunk... and this is all at a serious discount rate as our company is already worth roughly 1 million dollars...

Customer:

But this new partner brings a lot to the table, so we've arranged this sort of strategy for vesting him in...

bizlaw :

He has not vested but he holds the interest. If he leaves or does not meet the vesting standard, you take his interest back for the notes he issued. You can require that any profit he generates during the period he is not vested, remains in the company as part of his capital account until he vests.


If this answer is responsive to your question, please accept it. That is how we are compensated. I would also be appreciated if you provided feed back on your view of the answer. Finally, if the answer was especially helpful you can provide a bonus. If I can be of further assistance or you have other questions in the future you can ask for me and reach me at this site.


This communication is not intended as legal advice. A local attorney should always be consulted for legal advice. No client/attorney relationship is intended or created by this communication.

Customer:

So 3 note essentially?

bizlaw :

Yes

Customer:

And his capital account can be used to purchase these note, yes?

bizlaw :

He purchases his interest with the note which goes into his capital account. When he gives back his interest you cancel the note and the percentage represented by percentage of the capital account would be transferred back to the LLC.


If this answer is responsive to your question, please accept it. That is how we are compensated. I would also be appreciated if you provided feed back on your view of the answer. Finally, if the answer was especially helpful you can provide a bonus. If I can be of further assistance or you have other questions in the future you can ask for me and reach me at this site.


This communication is not intended as legal advice. A local attorney should always be consulted for legal advice. No client/attorney relationship is intended or created by this communication.

Customer:

So assuming he does not give back his interest, then at the time the note is paid off, he legally owns that percentage, yes?

bizlaw :

It is not up to him to give back his interest. The vesting is an agreement which is self executing. He does not perform his interest is cancelled in accordance with the agreement.


If this answer is responsive to your question, please accept it. That is how we are compensated. I would also be appreciated if you provided feed back on your view of the answer. Finally, if the answer was especially helpful you can provide a bonus. If I can be of further assistance or you have other questions in the future you can ask for me and reach me at this site.


This communication is not intended as legal advice. A local attorney should always be consulted for legal advice. No client/attorney relationship is intended or created by this communication.

Customer:

And how can we make the meeting of vesting standards equitable? it's very hard to trace specific growth to this individual's work entirely, it's kind of ambiguous... he's already added tremendous value even though it does not necessarily reflect in the botXXXXX XXXXXne as of yet...

Customer:

It's basically unless we have legitimate ground to terminate him, he vests...

bizlaw :

I can't create a standard. If you feel your current tractory is working then go with it. You should have some standards which are reasonably measurable in terms of relationship with the team or things that you think are important to make your organization work and realize the potential his addition adds. However, that does not necessarily mean it has to be tied to company performance.


If this answer is responsive to your question, please accept it. That is how we are compensated. I would also be appreciated if you provided feed back on your view of the answer. Finally, if the answer was especially helpful you can provide a bonus. If I can be of further assistance or you have other questions in the future you can ask for me and reach me at this site.


This communication is not intended as legal advice. A local attorney should always be consulted for legal advice. No client/attorney relationship is intended or created by this communication.

Customer:

Ok, understood...

Customer:

The reason for the things you commented were not typical of the vesting agreement at first are...

Customer:

The operating agreement is not up to date in the current company structure, and I wanted to draw a line int he sand that until it was brought current and accounted for this new partner that no vesting should take place... otherwise it can just get put off indefinitely...

bizlaw :

OK I understand then that should be a priority.

Customer:

And also the insurance factor is that this individual has a heart problem, and we are loathe to vest him in and take on any risk associated with that until he is covered with insurance... so it's not so much that he needs to worry about getting that insurance, we get it through the comapny, but it must be sorted out priof to any vesting...

bizlaw :

OK I understand that also

bizlaw :

Then you should put time parameters on it by which these things are to be done.

Customer:

Are the standard vesting agreements I have found online usable, or is this somethign that must be set up properly with a lawyer and both parties retaining council?

bizlaw :

You can use the standard vesting agreements as a template. I always recommend having an attorney work with you on these things because if they go well nobody will ever look at the vesting schedule, but if they go bad, then that agreements needs to cover all the bases and tries to foresee what could go wrong and how to deal with it.


If this answer is responsive to your question, please accept it. That is how we are compensated. I would also be appreciated if you provided feed back on your view of the answer. Finally, if the answer was especially helpful you can provide a bonus. If I can be of further assistance or you have other questions in the future you can ask for me and reach me at this site.


This communication is not intended as legal advice. A local attorney should always be consulted for legal advice. No client/attorney relationship is intended or created by this communication.

Customer:

Ok, thanks so much! Very helpful :-)

Customer:

Have a great Sunday!

bizlaw :

You too and good luck

bizlaw :

If you have no more questions, please accept the answer

Customer:

Will do!

Richard - Bizlaw, Attorney
Category: Business Law
Satisfied Customers: 8901
Experience: 30 years of corporate, litigation and international law
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