united-states, llc, business-structureI am close to creating a startup that I will be funding completely.
I have someone interested in doing a small amount of work in exchange for credit and attribution, and they have not asked for any money.
I am interested in offering them a small percentage of the company that I end up forming.
They won’t be investing any money, although they will be contributing work that was volunteered.
I want to ensure that they are not considered an employee, and will have no say in the running of the LLC, but will receive a percentage of the profit.
Would granting a small percentage to a shareholder be a solution to these issues?
From my experience it is a bad idea to just give equity. Equity is purchased and when more shares are generated is because you need to raise money and if someone does not want to be diluted they need to “pony up”. It can cause some major tax problems. Depending on the valuation of your company handing them 1% is equivalent to giving them money and they are responsible for paying taxes on that. You can justify giving them the equity if they are taking less pay than the average employee in the same job in the same location. If you do decide to handout equity, it would be intelligent to set up an ESOP plan and get out shares in the ESOP plan. I would never ever talk about giving a percentage of the company, only shares in a current pool of size x. When you have to contribute more money back into the company, you should issue more shares to yourself.
When you do give equity there should be a vesting period where if they are not contributing you can clawback that equity. You should also make it very clear that if they leave the company early they have to sell back immediately the equity had some predetermined value (like 1x the current revenue for the last 12mo).
FYI, as soon as someone is a vested owner and the LLC they can no longer receive a W-2 or 1099 but have to get a K2.
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