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Case Study: A growing business uses a new form of “profits interest” to attract quality employees

The Situation
Our client, a growing business, needed to attract and keep talented and loyal employees, but did not have the money to pay market rates. A typical solution for some businesses would be to offer the employees stock options, which provide a benefit to employees only if the business thrives and increases in value.

The rub: This business was structured as an LLC, and stock options lose most of their benefits and utility when used with an LLC due to unfavorable tax treatment. Our client needed a creative solution.

Our Solution
Our solution was to create a new form of incentive compensation for LLCs using so-called “profits interests” which we modified to work like stock options.

Traditionally, a profits interest is literally that – a right to receive a portion of the business’s annual profits, if any. That is not what is needed or wanted in this situation. Instead, we created a new form of “profits interest” (“Incentive Interests”) made to work and act much like a stock option such that it has no value when issued, but will allow the employee to receive a portion of the proceeds when the business is sold.

The Result
The Client has an extra form of incentive compensation to offer in the form of new-style profits interests (Incentive Interests) to attract and keep talented personnel. The only up-front cost to the company is the cost of forming and issuing these Incentive Interests to employees. With our solution, if the business fails to thrive and grow in value, these Incentive Interests cost the business nothing more than the cost of forming and issuing the Interests. But if the business thrives and grows in value, there is a win-win for the business and the employees, because not only is the business worth more, but the Incentive Interests now have real value and provide an appropriate reward to the employees for their help in building a successful business.