This is all very cool. But: don't operate a multi-partner company in any form, LLC or C-Corp, without formal vesting. Companies without vesting are rigged to explode if any member leaves.
Context for folks who haven't encountered vesting before: vesting is an arrangement where, instead of getting all of your ownership up front, you earn it over time. For example, you might have a fairly common arrangement in Silicon Valley where you get 1/4 of your equity after working for a year and the remaining 3/4 over the next 3 years. This pre-commits to what happens regarding ownership if someone leaves 18 months (or 18 days) into running the company.
Atlas C corporations with multiple founders have a vesting schedule built-in (4 year vesting; 1 year cliff), the market standard in Silicon Valley.
Vesting in an LLC is complicated:
Because an LLC is a partnership, there can be complicated consequences of someone stepping back from an operational role (like e.g. being a founder) but remaining an owner of the business. We didn't think it was appropriate to have a one-size-fits-all answer for this: some companies might choose to buy out the departing founder, some might choose to pay them dividends on an ongoing fashion, and some might not have financial bandwidth to pay dividends but might want them to participate in upside in the event of a future acquisition.
This is heavily dependent on facts-and-circumstances.
Vesting is more of an established concept, with off-the-shelf support throughout the ecosystem, for C corporations. For those who want it in an LLC, please speak to an attourney. You can still adopt it for your Stripe Atlas LLC, it just isn't built in to the default experience.
We paid a lawyer to put together an OE for us at Latacora (we have 10-year vesting). I assumed it would be complicated, but, nope, it works pretty much the way it would in any company: you vest equity over time, and if you leave halfway through your vesting term, you keep half your equity.
The only LLC-specific wrinkle I think we ran into is that we had to spell out that vested equity wasn't equivalent to a pro-rata claim on profits or distributions. But that's like a a sentence or two.
Non-vesting Atlas LLCs are probably super useful for a bunch of different kinds of companies.
But I'll argue that a non-vesting structure is never appropriate for a multi-member startup.
I'm not picking on Atlas; lots of people DIY or even pay lawyers to put this stuff together and get it wrong. We got it wrong at Matasano. It was painful.
We're a consulting firm. We looked back at Matasano and thought about how value was added over the life of the firm, and 4 years didn't nearly capture it. If we do product stuff, we'll just spin that out into a separate entity, and that would probably be 4/1.
Out of curiosity, if founders' shares vest who owns the stock before it vests? I'm thinking it will be the company but that doesn't feel quite right. Or does it mean that the unvested shares have no voting or other privileges?
There's a variety of ways to implement it. A common way is that you purchase your shares from the company for par value (e.g. $0.000001 per share) and the company has the right to repurchase them for par value, with the number of shares subject to repurchase declining over time as shares vest.
An LLC is not a partnership. (A limited liability partnership is an LLP.) An LLC is a distinct business structure with some similarities to a corporation, some to a partnership, and some unique features.
He's referring to the fact that, by default, the United States taxes LLCs having more than one member as a partnership. An interest in a partnership is taxed differently than an interest in a corporation (stock).
> Specifically, a domestic LLC with at least two members is classified as a partnership for federal income tax purposes unless [...etc...]
(To grandparent comment: for what it's worth, I too find it highly confusing that "partnership" and "LLP" (vs LLC) are both terms and not as closely related as one might first suspect...)
> for what it's worth, I too find it highly confusing that "partnership" and "LLP" (vs LLC) are both terms and not as closely related as one might first suspect...
They are just as closely related as one might suspect: an LLP is a partnership where the partners enjoy limited liability.
An LLC is not a partnership, though multimember LLCs are, by default, treated like a partnership for federal income tax purposes.
(The LLC is a fairly new form of business entity originally created as a lower overhead alternative to the corporation that would provide a distinct entity for corporate joint ventures; the LLP is also fairly new, but [in its US form] it was formed to protect innocent members of professional firms from personal liability for actions of other members of the firms, and is in many jurisdictions restricted to professional firms.)
Owners of LLCs and LLPs generally have "limited liability" with respect to their equity investment, meaning that they are only liable for the entity's debts to the extent of their investment.
The primary difference between an LLC and an LLP: an LLC must have at least one "general partner" who is fully liable for all of the LLP's debts in the event the LLP defaults.
Another major difference: until recently, law firms and accounting firms could be LLPs but not LLCs, due to malpractice liability concerns. Now that most bar associations and/or states require these firms to maintain malpractice insurance, many states allow law firms and accounting firms to be LLCs.
LLCs are partnerships for tax purposes in the US (unless they have only a single owner, in which case they are disregarded), hybrid entities for legal purposes in the US however many owners they have, and are either corporations or partnerships outside the US depending on the country. Most countries treat LLCs as corporate-type entities regardless of the number of owners, and only a handful will treat an LLC as a disregarded entity if it has a single owner.
Nope, still more complicated than that. Single member LLCs are not partnerships by default. Multimember LLCs are partnerships by default. Either group can choose to be a yet a different category. See citation and quote in https://news.ycombinator.com/item?id=16961968 .
You're right, I left out that single member LLCs are disregarded entities because I wasn't trying to be comprehensive. I've updated the comment with more detail.
This brings up a very interesting issue under the Delaware Limited Liability Company Act, that is without an Operating Agreement in place that allows a Member to resign their ownership, the Delaware Law is controlling and does not allow a member of a multi-member LLC to withdraw (resign their interest) prior to dissolution and winding up of the company. One may be able to get the other member(s) to consent in writing but at the point someone wants to leave, good luck getting the other(s) to sign anything.
Edit: it doesn’t appear the Stripe Atlas LLC comes with an operating agreement; therefore, the Delaware Limited Liability Company Act is controlling and a Member would not have the right to resign their interest prior to dissolution.
Also, it’s important to keep in mind that a vesting schedule is just a piece of paper at the end of the day. Even if you have one signed and notarized, it’s just a contract. In America, contracts boil down to who has more money to dispute one in court. If you’re a scrappy startup, and one of your founders is wealthy- be careful. They can destroy your business fighting a multi year civil court case.
Can you elaborate on what this means? What is formal vesting (and as opposed to what... informal vesting?) and how does not doing it make a company explode?
I’m sure I’m not the only one here who has never started a company and has no idea what this means. :)
Without a written vesting schedule for ownership of shares of a company, a founder could leave (or die or become disabled/incompetent due to sickness/accident) and keep their (or their estate's) share of the company. Those events can completely destroy the value of a company. For example in a 50/50 partnership, the remaining partner would be responsible for 100% of the work, but only receive 50% of the dividends or liquidation value. Those type of events are hard enough to deal with anyway - not having a vesting schedule makes it almost impossible to recover from. For instance if there _was_ a vesting schedule for a partner that left after a very short period of time, the unvested equity could be used to attract another partner.
The vesting schedule should reflect their contribution to the company over time, and can be whatever the founders negotiate as reasonable. If someone helps found a company and brings a ton of immediate value (ie IP or cash or contracts, etc) then their vesting schedule can reflect that. Issues such as assignment to estate or beneficiaries are important legal issues that need to be considered at startup time as 'insurance' against things no one wants to see happen, but might.
It's also important to note that much of the value of any company created in the future as it grows, matures, etc. It sometimes happens that people default to ascribing value based on history or past contributions -- which certainly does matter with respect to the idea, tech, product, early customers, etc -- but is an incomplete ascription of anyone's particular value with respect to the life of a company. Depending on what stage the company is in -- but because we are talking about formation we can assume it is early -- much of the work is likely yet to come. If the past is too heavily weighted, it can cripple the company in the future. Among other things, vesting can help protect founders against over-indexing on the past while ensuring the team is aligned on the future of the company and that are all in it "for the long-haul". Plenty of other reasons to do so as noted in the other comments throughout the thread.
if you get in a fight with your cofounder on day 2, you really don't want them to quit and still own half the company. "Formal" in the sense that it's written down in a binding legal document as opposed to a "handshake agreement."
