Synthetic Equity — Pros > Cons For Startups?

In the US, limited liability corporations (LLCs) are a recent phenomenon — Wyoming pioneered them in 1977, the IRS issued comprehensive rules around their taxation in 1988, and by 1996 all 50 states had LLC statutes. LLCs are almost by definition a hybrid of corporations and partnerships, which comes with advantages (e.g., taxation) but also disadvantages (e.g., no way to issue options). And that’s where “synthetic equity” comes into play, as an increasingly common way for LLCs to compensate their employees. But before we can focus on that this article will start with some basic definitions. 1) Basic Definitions There…...