1. Slicing Pie – Legal and Tax Issues
Primary Legal/Tax Issues
Control of the company when Grunt Fund is operating
Avoiding tax when Grunt Fund “split” occurs
Achieving “rules” of the book

2. Slicing Pie – Legal and Tax Issues
Control of Company while Grunt Fund is in place
Don’t need business entity
If have a business entity, need to make two decisions:
How much initial equity to grant
If corporation, small amount is suggested (10 shares total)
If LLC, percentages only
Comprehensive agreement now or later
Operating Agreement
Shareholder Agreement
Or if none, then rules set forth under statute

3. Slicing Pie – Legal and Tax Issues
Avoiding tax on Grunt Fund “Split”
Here’s the issue:
IRS assumes that equity is always split up-front (often, business value at this point is $0)
Slicing Pie calls for Grunt Fund to determine equity split on some future date (when the business could have some real value)
The grant of valuable equity is income to the recipient

4. Slicing Pie – Legal and Tax Issues
Avoiding Tax on Grunt Fund “Split”
Here’s the solution for Corporations:
At the beginning of the Grunt Fund, all participants are granted some number of shares of Restricted Stock
Restricted Stock is stock which is subject to vesting
Restricted Stock can be valued in one of two ways
When vested (future date)
When it is initially granted (current date – must make 83(b) election)
Participants make 83(b) election immediately to recognize $0 taxable income
Grunt Fund “split” occurs at some future date employees are ratably

5. Slicing Pie – Legal and Tax Issues
Avoiding Tax on Grunt Fund “Split”
Here’s the solution for LLCs:
At the beginning, participants can but need not be assigned a percentage interest in the LLC
At the Grunt Fund “split” the participants’ percentage interests are modified per the Grunt Fund
The new percentage interests count for voting and future profits
For very complicated tax reasons, these percentages might not apply to losses for a while
If the company were to dissolve, any assets would be distributed based on “capital accounts” again, for complicated tax reasons.

6. Slicing Pie – Legal and Tax Issues
Achieving Other “Rules” of Book
Grunt Fund Split
Agreement of everyone
“Sufficient” cash flow from investment (defined) or operations (undefined)
Sales of the company
New Grunts – Agreement of Grunt Leader

7. Slicing Pie – Legal and Tax Issues
Achieving Other “Rules” of Book
Termination
Resignation
Without Good Reason
Company has option to return “hard” inputs (not including time) as buy-out; OR
Allow Grunt to retain equity (no voting)
With Good Reason
Company has option to return full value of all inputs (including time) as buy-out (or FMV if greater) plus claw-back sale if within 1 year; OR
For Cause – Same as resignation without Good Reason
Without Cause – Same as resignation with Good Reason