Time-vested and performance-vested interest units

Many LLC companies award performance interest units to partners, management members, and employees. These units may vest based on time or company performance, often tied to a multiple of the initial investment at exit. Here we describe how to model time-vested and performance-based tranches in the Equity LLC waterfall.

Time-vested units without a participation threshold

  1. Create either a preferred or common class for the performance units.

  2. Enter a value in the Price per unit field.

    This can be any figure as it won't be used in the calculation.

  3. Create an option pool for the class created in the previous step.

  4. Set the time-based vesting schedule.

  5. Create the grants according to the vesting schedule.

  6. Verify that the units participate in the relevant waterfall steps.

    Note

    Diligent Equity calculates the number of vested units based on the vesting schedule and the As-of date of the waterfall.

Time-vested units with a participation threshold

  1. Identify the unit class's price per unit (PPU) that sets the participation threshold.

  2. Create a separate class for each threshold.

  3. Create an option pool for each class.

    Make sure the correct class is selected.

  4. Assign grants and define the vesting schedule for each class.

  5. Set a PPU threshold step for each participation threshold defining the following:

    1. Threshold type: Select PPU.

    2. PPU: Enter the exercise price for the units (Example: $2 or $3).

    3. Class: Specify the class to which the units will be converted upon exercise.

  6. Verify that the units participate in the relevant waterfall steps.

Unit vesting based on investment multiples

  1. Create a separate class for each multiple.

  2. Allocate grants to each class.

    Note

    You don't need to create option pools for these units.

  3. Add a return multiple threshold step to the waterfall defining the following:

    1. Threshold type: Select Return multiple.

    2. Multiple: Set the desired threshold value (Example: 1.5x).

    3. Class: Select the class (or classes used to calculate the multiple) typically the lead investor’s class.

  4. Verify that the units participate in the relevant waterfall steps.

    Note

    You must add the class of vested shares as a participating class to all the distribution rules of subsequent steps.