What is Profit Units Agreement Drafting?
A profit units agreement is a legal contract that gives a partner, contractor, or an employee a share of future company profits and equity appreciation without an upfront capital contribution.
Profit units can be described as rights that allow someone to receive specified profits or financial gains. For example, a company might reward their manager with profit units instead of ordinary shares, giving them a percentage of future profits in the company value.
When drafting a profit units agreement, make sure you specify important details. Read the rest of this article for information to include in the document and how a lawyer can assist you with the drafting process.
What are Key Terms to Include in a Profit Units Agreement?
A profit units agreement usually contains the following core information:
- Grant details. Identify both parties and the grant date. Include the number and class of units.
- Profits. Explain what future profits are included, such as operational net income and liquidity event payouts.
- Vesting schedule. State when units vest and any cliff periods.
- Distributions. Explain how distributions are calculated and paid.
- Transfer restrictions. The agreement should restrict any transfers without the company first giving approval.
What are Tips for Drafting a Profit Units Agreement?
A profit units agreement requires clarity and details. Here are some things to bear in mind during the drafting process so that you achieve your goals, such as providing incentives for employees.
Define the Agreement Purpose
Consider why the profit units are being granted and who is eligible to receive them. This provides a greater purpose for the agreement and gives it context.
Specify the Profit Units
Explain if the profit units provide a right for receiving a share of profits, business sale proceeds, or something else. You have to clarify this so that the recipient understands exactly what they’re getting. It minimizes your risk of disputes.
Establish Vesting Conditions
Make sure your agreement clarifies when units become fully earned and if vesting occurs over time. You should also specify if it is determined by performance targets or continued service.
Address Departure
You want to explain what happens if the recipient leaves the company, such as if they resign or are fired. For example, define what repurchase or cancellation processes are involved in the agreement.
Protect Confidential Information
You might not think about the confidential information that is shared between parties, but it’s important to explain restrictions on what information can be used or disclosed to protect your interests.
Consider Business Changes
Another important element of your agreement should include addressing what happens if there are significant company changes, such as if the business merges with another company, there’s restructuring in the company, or the business is sold.
Should You Hire a Lawyer to Draft Your Profit Units Agreement?
Hiring a lawyer to draft your profit units agreement is recommended. A lawyer will help you in various ways during the drafting process, such as by:
- Reviewing your business structure. They’ll assess how the profit units should be structured, preventing generic contract terms.
- Defining the profit units. They’ll explain what units represent and what rights they provide, such as rights to distributions or future business value increases.
- Determining the grant. They’ll set up the number of units awarded and the grant date.
- Drafting clear profit calculations. For clarity, a lawyer will explain exactly how profits are calculated.
- Establishing distribution agreements. A lawyer will clarify when payments must be made to prevent payment disputes.
- Setting vesting conditions. They’ll draft requirements for when recipients earn their rights.
- Addressing transfers. They’ll consider if units can be sold or transferred. This serves to protect the company’s interests.
- Negotiating terms. If required, you can ask a lawyer to discuss any concerns or terms with the other party to finalize the agreement and ensure it has balanced terms.
- Reviewing your profit units agreement. If you’ve already drafted your agreement, you can hire a qualified lawyer to review it for you. This will minimize your risks and protect your interests.
Where to Find a Lawyer for Profit Units Agreement Drafting
If you need to hire a lawyer to draft your profit units agreement, you should use an online legal platform to help you find one. This makes the lawyer search a much easier process than if you have to call traditional law firms in your area.
ContractsCounsel is one of the largest online legal marketplaces that gives you access to lawyers who are experienced and reliable. They can help you by drafting your profit units agreement for you.
Here are the easy steps to follow when asking a lawyer from ContractsCounsel to draft your agreement for you.
- Go to the ContractsCounsel marketplace.
- Choose ‘One-time project’ and ‘Create or update contract.’ Alternatively, if you need to ask a lawyer to review your agreement, select ‘Review contract.’
- Post your project for free. Include some details of what you need to match with suitable lawyers.
- Wait for bids. You’ll receive multiple bids from lawyers directly on the platform who are ready to assist you with your contract drafting requirements. This prevents you from having to search for lawyers as they will reach out to you.
- Review the platform’s lawyer data. This includes information such as the lawyers’ location, years of experience, field of expertise, credentials, and client ratings for projects lawyers have previously completed on the platform.
- Select a lawyer and hire them to draft or review your profit units agreement for a flat fee.
