How do I handle compensating a non-member of an LLC for IP?


My partners and I are in the process of forming an LLC for our startup. We're admittedly pretty new to this, and I'm confused about how to handle compensations for some IP a non-member contributed. Essentially, we were working with an individual who contributed some early database design work (the IP) but then left, broke things off with us, and has made it pretty clear she doesn't want to or intend to work with us in the future. We want to protect our IP situation but don't want to straight up buy her IP; she wants a share (limited, perhaps over a couple years) in profits.
So my understanding is that this would be a profit interest, but she is a non-member and I'm not clear that we can do this.

So the question is: how do the operators of an LLC startup provide non-cash compensation to a non-member for IP or services provided?

LLC Compensation Intellectual Property

asked Jul 30 '13 at 23:28
Samuel Kordik
6 points
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1 Answer


You've got two basic options here - stock and options. There are a third and fourth options I will come to at the end.

Stock means that you are providing shares that you will have to honour with voting rights, revenue shares etc for as long as they are held. Depending on the stock issued and the rules set up (like the option of first refusal to current holders etc) your IP contributor is going to reap the harvest from you perhaps forever.

An option is slightly different. Options value comes only from the difference in current stock prices and the option price. Options can also expire. So say right now your stock has a nominal value of US$1.00 then you might offer a ten year option of X stock at the value. Later if stock prices are US$4.50 then a profit of US$3.50 can be realised by taking advantage of the low stock price and then selling. Of course the options have to be exercised inside the time limit.

The third option is to assess the ownership of the IP. This is a tricky option and depends on local laws as much as anything else. As a rule of thumb if the IP provider can be said to have been working in the employment of the company then the IP belongs to the company (in most cases).

Furthermore if the IP were accessed could it be shown to be nontrivial. If not then your IP provider might have no claim.

For example if I normalised your database for you and worked out some table schema it could be said that I did what any undergrad could have done and my work is trivial and might not have IP rights associated. On the other hand if I just created a new binary indexing system for the database then that would clearly be non-trivial and if I still owned the IP you would need to have licensed it from me...

When making an offer consider that the size of your initial offer and the final settlement amount could be used to determine if the settlement was trivial or not. For example if I'm willing to accept a few notes for my work it could be argued that I have no IP claims as the work seems on the value of payment to be trivial.

In the UK at least and I imagine the rest ofthe world a company can issue different classes of shares. Perhaps the partnership could issue profit only shares worth a percentage of the total profit issue?

The other option is to reduce the participation of the current IP and to replace it with work that will be carried out for cold uncomplicated cash. The fact that you say "early database design work" makes me wonder just how much work was contributed? Could what is left of her work be derived from the data? For example if I designed some tables for,say, school admissions, most of my work is not original invention but simply normal extrapolation from the data that it needs to hold. If the school needs to hold name address and phone number my adding these fields to the table student is trivial work. And I would be looking to ask if the remaining contribution is also trivial. Which brings us full circle back to the is it IP question again.

In many cases database design is about working out what the data needs rather than actually creating anything. In fact this forum user here is arguing from US case law that a database design cannot carry a patent: I would say that you have very little to actually worry about.

answered Aug 10 '13 at 11:32
Matthew Brown
416 points

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