Future services seem like a great no-cost way to buy equity in a startup. In California, however, whether you legally can buy equity with future services depends on whether the startup is a corporation or a limited liability company (LLC).
Corporations Code Section 409(a)(1) specifies the types of “consideration” that can be paid for corporate shares. These include, for example, “money paid; labor done; [and] services actually rendered to the corporation or for its benefit or in its formation or reorganization”.
However, “neither promissory notes of the purchaser [subject to certain exceptions] nor future services shall constitute payment or part payment for shares of the corporation“. So a California corporation cannot grant shares in exchange for future services.
The situation is different for LLCs, however.
- Corporations Code Section 17200(a) states that a capital contribution for LLC membership may include an “obligation…to render services”. This statute will remain in effect through 2013.
- Corporation Code Section 17704.02 will take effect on January 1, 2014. That statute states that a contribution may consist of “contracts for services to be performed.”
So a limited liability company can grant a membership interest in exchange for future services.
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Dana H. Shultz, Attorney at Law +1 510 547-0545 dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.
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