) before final execution.

JURISDICTION: Universal (with state-specific notes where applicable)
LAST UPDATED: 2026-03-16
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PHANTOM EQUITY / PROFITS INTEREST INCENTIVE PLAN

FOR LIMITED LIABILITY COMPANIES

PLAN OVERVIEW

Purpose and Background

This Phantom Equity / Profits Interest Incentive Plan (the "Plan") is established by [________________________________] LLC, a [________________________________] limited liability company (the "Company"), to attract, retain, motivate, and reward key employees, managers, independent contractors, and other service providers who contribute materially to the success of the Company.

The Plan authorizes two distinct categories of incentive awards, each with different legal, tax, and economic characteristics:

• Phantom Equity Units — Contractual rights to receive cash payments tied to the value of the Company, without conferring any actual ownership, membership interest, voting rights, or equity stake in the Company; and

• Profits Interest Units — Actual membership interests in the Company that entitle the holder to share in future profits and appreciation in value above a specified threshold (the "Hurdle Amount"), subject to the safe harbor provisions of IRS Revenue Procedure 93-27 and Revenue Procedure 2001-43.

The Company may grant either or both types of awards to any eligible Participant under the Plan, as determined by the Plan Administrator in its sole discretion.

Phantom Equity vs. Profits Interest Comparison

PART I: DEFINITIONS

Section 1.1 — Definitions

Capitalized terms used in this Plan shall have the following meanings unless the context clearly requires otherwise:

(a) "Affiliate" means any entity that directly or indirectly controls, is controlled by, or is under common control with the Company, including any entity in which the Company owns a fifty percent (50%) or greater interest.

(b) "Award" means a grant of Phantom Equity Units, Profits Interest Units, or both, made to a Participant under this Plan.

(c) "Award Agreement" means the written agreement between the Company and a Participant that sets forth the terms, conditions, and restrictions applicable to an Award, substantially in the form attached hereto as Exhibit A (for Phantom Equity Units) or Exhibit B (for Profits Interest Units).

(d) "Board" means the Board of Managers of the Company, or if no Board of Managers exists, the Managing Member(s) of the Company.

(e) "Capital Account" means the capital account maintained for each holder of a Profits Interest Unit in accordance with Treasury Regulation § 1.704-1(b)(2)(iv) and the Company's Operating Agreement.

(f) "Cause" means, unless otherwise defined in the applicable Award Agreement:

(i) the Participant's conviction of, or plea of guilty or nolo contendere to, any felony or any crime involving fraud, dishonesty, or moral turpitude;

(ii) the Participant's willful misconduct or gross negligence in the performance of the Participant's duties to the Company;

(iii) the Participant's material breach of any written agreement with the Company, including any confidentiality, non-competition, non-solicitation, or intellectual property assignment agreement;

(iv) the Participant's willful failure or refusal to perform the Participant's material duties after written notice and a reasonable opportunity to cure (not to exceed thirty (30) days);

(v) the Participant's commission of any act of fraud, embezzlement, or misappropriation against the Company or any Affiliate; or

(vi) the Participant's material violation of any written Company policy after written notice and a reasonable opportunity to cure (not to exceed thirty (30) days).

(g) "Change of Control" means the occurrence of any of the following events:

(i) the sale, lease, exchange, or other disposition of all or substantially all of the assets of the Company to any Person or group of related Persons;

(ii) a merger, consolidation, reorganization, or similar transaction in which the members of the Company immediately prior to such transaction hold less than fifty percent (50%) of the voting power or equity interests in the surviving entity;

(iii) the acquisition by any Person or group of related Persons, in a single transaction or series of related transactions, of more than fifty percent (50%) of the total membership interests or voting power of the Company;

(iv) the sale or transfer of more than fifty percent (50%) of the outstanding membership interests of the Company in a single transaction or series of related transactions; or

(v) the liquidation or dissolution of the Company.

(h) "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor statute. References to any section of the Code shall include any applicable Treasury Regulations and administrative guidance promulgated thereunder.

(i) "Company" means [________________________________] LLC, a [________________________________] limited liability company, and any successor thereto.

(j) "Disability" means the Participant's inability to perform the essential functions of the Participant's position, with or without reasonable accommodation, for a period of one hundred eighty (180) consecutive days or for an aggregate of two hundred seventy (270) days in any twelve (12)-month period, as determined by the Plan Administrator in good faith, based upon competent medical evidence.

(k) "Distribution Threshold" or "Hurdle Amount" means, with respect to Profits Interest Units, the Fair Market Value of the Company as of the Grant Date, as determined by an independent valuation or the methodology set forth in Exhibit C, above which the holder of Profits Interest Units shall be entitled to participate in distributions and allocations.

(l) "Equity Value" means the Fair Market Value of one hundred percent (100%) of the equity of the Company, determined on a going-concern basis, as of the applicable Valuation Date.

(m) "Fair Market Value" or "FMV" means the fair market value of the Company or a Unit (as applicable), determined in good faith by the Plan Administrator using one or more of the methods described in Section 8.1 and Exhibit C hereof.

(n) "Good Reason" means, unless otherwise defined in the applicable Award Agreement, the occurrence of any of the following events without the Participant's prior written consent:

(i) a material diminution in the Participant's base compensation, authority, duties, or responsibilities;

(ii) a material change in the geographic location at which the Participant must perform services (generally, a relocation of more than fifty (50) miles); or

(iii) any material breach by the Company of the Award Agreement or any other agreement with the Participant;

provided, that the Participant must provide written notice to the Company within ninety (90) days of the initial occurrence of the Good Reason event, and the Company shall have thirty (30) days to cure the condition. If the Company fails to cure, the Participant must terminate service within thirty (30) days after the cure period expires.

(o) "Grant Date" means the date on which an Award is granted to a Participant by the Plan Administrator, as specified in the applicable Award Agreement.

(p) "Operating Agreement" means the Limited Liability Company Operating Agreement of the Company, as amended from time to time.

(q) "Participant" means any Eligible Person who has been granted an Award under this Plan and has executed an Award Agreement.

(r) "Person" means any individual, corporation, limited liability company, partnership, trust, estate, association, or other entity.

(s) "Phantom Equity Unit" means a notional unit granted under this Plan that represents a contractual right to receive a cash payment equal to the value of one hypothetical unit of membership interest in the Company, subject to the terms and conditions of the Plan and the applicable Award Agreement. Phantom Equity Units do not confer any actual ownership, membership interest, voting rights, or equity interest in the Company.

(t) "Plan" means this Phantom Equity / Profits Interest Incentive Plan, as amended from time to time.

(u) "Plan Administrator" means the Board, or a committee designated by the Board (the "Committee"), or such other Person(s) as the Board may designate to administer the Plan.

(v) "Profits Interest Unit" means an interest in the Company that is intended to qualify as a "profits interest" within the meaning of IRS Revenue Procedure 93-27, 1993-2 C.B. 343, as clarified by Revenue Procedure 2001-43, 2001-2 C.B. 191, entitling the holder to share in future profits and appreciation of the Company above the applicable Distribution Threshold / Hurdle Amount, but which would not entitle the holder to any proceeds if the assets of the Company were sold at their Fair Market Value as of the Grant Date and the proceeds were distributed in complete liquidation of the Company immediately following the Grant Date.

(w) "Section 409A" means Section 409A of the Code and the Treasury Regulations and guidance promulgated thereunder.

(x) "Separation from Service" means a "separation from service" within the meaning of Section 409A and Treasury Regulation § 1.409A-1(h), as determined by the Plan Administrator.

(y) "Service Provider" means any individual who provides bona fide services to the Company or any Affiliate as an employee, independent contractor, manager, officer, director, or consultant.

(z) "Specified Employee" means a "specified employee" as defined in Section 409A(a)(2)(B)(i) of the Code, as determined by the Plan Administrator in accordance with the procedures established by the Company.

(aa) "Unit Value" means, with respect to a Phantom Equity Unit as of any Valuation Date, the quotient obtained by dividing the Equity Value by the total number of outstanding membership units (or their equivalent) of the Company on a fully diluted basis, subject to any adjustments set forth in the Award Agreement or this Plan.

(bb) "Valuation Date" means the date as of which the Fair Market Value of the Company is determined for purposes of calculating Unit Value, Distribution Threshold, or payout amounts under the Plan.

(cc) "Vesting Commencement Date" means the date on which the vesting of an Award begins, as specified in the applicable Award Agreement (which may be the Grant Date or another specified date).

(dd) "Vesting Schedule" means the schedule of vesting applicable to an Award, as set forth in the applicable Award Agreement in accordance with Section 5.1.

PART II: ELIGIBILITY AND PLAN ADMINISTRATION

Section 2.1 — Eligible Persons

The following categories of Service Providers are eligible to receive Awards under this Plan (each, an "Eligible Person"):

(a) Employees of the Company or any Affiliate (full-time or part-time);

(b) Officers and managers of the Company or any Affiliate;

(c) Members of the Board (or equivalent governing body);

(d) Independent contractors and consultants providing bona fide services to the Company or any Affiliate; and

(e) Such other Service Providers as the Plan Administrator may determine in its sole discretion.

Note Regarding Profits Interest Units and Employee Status: A Participant who receives Profits Interest Units will be treated as a partner of the Company for federal income tax purposes. If the Participant was previously classified as a W-2 employee, the Company must reclassify the Participant's compensation as partnership income reported on Schedule K-1 (Form 1065) rather than Form W-2. The Company and Participant should consult with tax counsel regarding this reclassification.

Section 2.2 — Plan Administrator

(a) Designation. The Plan shall be administered by the Plan Administrator. The Board may designate a Committee of not fewer than two (2) members to serve as the Plan Administrator.

(b) Authority. The Plan Administrator shall have full and exclusive authority, in its sole discretion, to:

(i) determine which Eligible Persons shall receive Awards and the type, size, and terms of each Award;

(ii) interpret the Plan and any Award Agreement;

(iii) adopt, amend, and rescind rules and procedures for the administration of the Plan;

(iv) determine the Fair Market Value of the Company and the Unit Value;

(v) determine whether and to what extent Awards have vested or been forfeited;

(vi) determine the treatment of Awards upon a Participant's Separation from Service, Change of Control, death, or Disability;

(vii) accelerate vesting or waive forfeiture conditions in its sole discretion;

(viii) engage independent appraisers, legal counsel, tax advisors, and other professionals;

(ix) correct any defect, supply any omission, and reconcile any inconsistency in the Plan or any Award Agreement; and

(x) make all other determinations and take all other actions necessary or advisable for the administration of the Plan.

(c) Binding Decisions. All decisions, determinations, and interpretations of the Plan Administrator shall be final, conclusive, and binding on all parties, including the Company, all Participants, and their beneficiaries, heirs, and successors.

(d) Indemnification. The Company shall indemnify and hold harmless each member of the Board and the Committee from and against any loss, cost, liability, or expense (including reasonable attorneys' fees) arising out of any act or omission in connection with the administration of the Plan, except for acts of gross negligence or willful misconduct.

Section 2.3 — Aggregate Plan Limits

(a) Phantom Equity Pool. The maximum aggregate number of Phantom Equity Units that may be outstanding at any time under the Plan shall not exceed an amount representing [____]% of the Equity Value of the Company on a fully diluted basis.

(b) Profits Interest Pool. The maximum aggregate number of Profits Interest Units that may be issued and outstanding at any time under the Plan shall not exceed [____]% of the total membership interests of the Company on a fully diluted basis.

(c) Recycling. If any Award is forfeited, cancelled, expires, or terminates without full payment or settlement, the Units subject to such Award shall again become available for grant under the Plan.

PART III: PHANTOM EQUITY UNIT PROVISIONS

Section 3.1 — Grant of Phantom Equity Units

(a) Grant. The Plan Administrator may, from time to time, grant Phantom Equity Units to any Eligible Person. Each grant shall be evidenced by an Award Agreement substantially in the form of Exhibit A, which shall specify:

(i) the number of Phantom Equity Units granted;

(ii) the Grant Date;

(iii) the Unit Value as of the Grant Date (the "Base Value");

(iv) the Vesting Schedule;

(v) the Payout Trigger Events;

(vi) the form and timing of payment;

(vii) any forfeiture conditions; and

(viii) any other terms and conditions determined by the Plan Administrator.

(b) Phantom Equity Unit Types. The Plan Administrator may grant either or both of the following types of Phantom Equity Units:

(i) Full Value Units — Units that entitle the Participant to receive a cash payment equal to the full Unit Value as of the applicable Payout Date; or

(ii) Appreciation-Only Units (also known as "Unit Appreciation Rights" or "UARs") — Units that entitle the Participant to receive a cash payment equal to the excess, if any, of the Unit Value as of the applicable Payout Date over the Base Value established as of the Grant Date.

(c) No Membership Interest. Phantom Equity Units are contractual rights only and do not constitute actual membership interests in the Company. The grant of Phantom Equity Units shall not entitle the Participant to any voting rights, distribution rights, management rights, or other rights of a member of the Company.

(d) Unfunded Obligation. The Company's obligation to make payments with respect to Phantom Equity Units shall be an unfunded, unsecured general obligation of the Company. No Participant shall have any interest in any specific assets of the Company by reason of the Plan. The Company shall not be required to establish any trust, escrow, or sinking fund in connection with its obligations under the Plan.

Section 3.2 — Valuation of Phantom Equity Units

(a) Determination of Unit Value. The Unit Value of a Phantom Equity Unit as of any Valuation Date shall be determined by the Plan Administrator in good faith, using one or more of the following methods:

(i) Independent Appraisal. A valuation prepared by a qualified independent appraiser in accordance with generally accepted valuation standards (e.g., ASA, AICPA, NACVA standards);

(ii) Formula Method. A pre-determined formula set forth in the Award Agreement or Exhibit C hereof (e.g., a multiple of trailing twelve-month EBITDA, revenue, or book value);

(iii) Recent Transaction. The price per unit established in a bona fide arm's-length transaction involving the sale or transfer of membership interests in the Company within the twelve (12) months preceding the Valuation Date; or

(iv) Board Determination. A good faith determination by the Board, taking into account all relevant factors, provided that such determination is reasonable and documented in writing.

(b) Valuation Frequency. The Plan Administrator shall cause the Company to be valued:

(i) at least annually, as of the last day of each fiscal year;

(ii) upon the occurrence of any Payout Trigger Event;

(iii) upon the occurrence of any Change of Control; and

(iv) at such other times as the Plan Administrator deems necessary or appropriate.

(c) Section 409A Valuation Standard. For purposes of compliance with Section 409A, all valuations shall be made in a manner consistent with Treasury Regulation § 1.409A-1(b)(5)(iv) and shall constitute a "reasonable application of a reasonable valuation method" within the meaning of such regulation.

(d) Adjustments. The Plan Administrator may make equitable adjustments to the Unit Value to account for:

(i) capital contributions, distributions, or recapitalizations;

(ii) issuance of additional membership interests;

(iii) extraordinary or non-recurring items; and

(iv) any other events that the Plan Administrator determines, in its reasonable discretion, would result in an inequitable Unit Value.

Section 3.3 — Payout Trigger Events

(a) Payout Triggers. Unless otherwise specified in the applicable Award Agreement, payment with respect to vested Phantom Equity Units shall be triggered upon the earliest to occur of the following events (each, a "Payout Trigger Event"):

(i) Separation from Service. The Participant's Separation from Service for any reason (including termination by the Company with or without Cause, resignation by the Participant with or without Good Reason, retirement, death, or Disability);

(ii) Change of Control. A Change of Control of the Company;

(iii) Fixed Date. A specified date or the expiration of a fixed term set forth in the Award Agreement;

(iv) Liquidity Event. An initial public offering, qualified financing, or other liquidity event as defined in the Award Agreement; or

(v) Other Events. Such other events as specified in the Award Agreement, provided that each such event constitutes a permissible payment event under Section 409A.

(b) Section 409A Permissible Payment Events. Each Payout Trigger Event must constitute a permissible payment event under Section 409A, including:

☐ Separation from Service (Treas. Reg. § 1.409A-3(a)(1))

☐ Disability (Treas. Reg. § 1.409A-3(a)(2))

☐ Death (Treas. Reg. § 1.409A-3(a)(3))

☐ Change in Control (Treas. Reg. § 1.409A-3(a)(5))

☐ Fixed Date or Fixed Schedule (Treas. Reg. § 1.409A-3(a)(4))

☐ Unforeseeable Emergency (Treas. Reg. § 1.409A-3(a)(6))

Section 3.4 — Payment Mechanics

(a) Form of Payment. Payment with respect to vested Phantom Equity Units shall be made in cash, by wire transfer or company check, unless the Award Agreement provides for an alternative form of payment. The Plan Administrator may, in its sole discretion, provide for payment in the form of:

(i) a single lump-sum payment;

(ii) installment payments over a period not to exceed [____] years; or

(iii) a combination of lump-sum and installment payments.

The form of payment shall be specified in the Award Agreement at the time of grant and may not be changed after the Grant Date except as permitted by Section 409A.

(b) Timing of Payment. Unless otherwise specified in the Award Agreement:

(i) Lump-Sum Payments. Lump-sum payments shall be made within sixty (60) days following the applicable Payout Trigger Event, but in no event later than March 15 of the calendar year following the calendar year in which the Payout Trigger Event occurs (the "Short-Term Deferral Period"), to qualify for the short-term deferral exemption under Treasury Regulation § 1.409A-1(b)(4).

(ii) Installment Payments. The first installment shall be paid within sixty (60) days following the Payout Trigger Event, with subsequent installments paid in accordance with the schedule set forth in the Award Agreement.

(c) Specified Employee Delay. If the Participant is a Specified Employee and the Payout Trigger Event is a Separation from Service, payment shall not be made earlier than the first business day that is six (6) months after the date of the Participant's Separation from Service (or, if earlier, the date of the Participant's death), to the extent required by Section 409A(a)(2)(B)(i). Any payments that would otherwise have been made during such six-month period shall be accumulated and paid in a single lump sum on the first business day after the six-month period expires, together with interest at the applicable federal rate.

(d) Payout Calculation.

(i) Full Value Units. The payout for each vested Full Value Phantom Equity Unit shall equal the Unit Value as of the applicable Valuation Date.

(ii) Appreciation-Only Units. The payout for each vested Appreciation-Only Phantom Equity Unit shall equal the excess, if any, of (A) the Unit Value as of the applicable Valuation Date, over (B) the Base Value established as of the Grant Date.

(iii) Example (Full Value). If a Participant holds 100 vested Full Value Units and the Unit Value as of the Payout Trigger Event is $1,000, the total payout equals 100 x $1,000 = $100,000.

(iv) Example (Appreciation-Only). If a Participant holds 100 vested Appreciation-Only Units with a Base Value of $500 per Unit, and the Unit Value as of the Payout Trigger Event is $1,000, the total payout equals 100 x ($1,000 - $500) = $50,000.

(e) Distribution Equivalent Rights. The Plan Administrator may, in its discretion, provide in an Award Agreement that a Participant shall be entitled to receive Distribution Equivalent Rights ("DERs") — notional amounts equal to the distributions that would have been paid on the Phantom Equity Units had they been actual membership interests. DERs, if granted, may be:

(i) paid currently as received;

(ii) accumulated and paid upon the applicable Payout Trigger Event; or

(iii) subject to the same Vesting Schedule as the underlying Phantom Equity Units.

Section 3.5 — Forfeiture of Phantom Equity Units

(a) Unvested Units. Any Phantom Equity Units that have not vested as of the date of a Participant's Separation from Service shall be automatically and immediately forfeited without consideration.

(b) Forfeiture for Cause. If a Participant's service is terminated for Cause, all Phantom Equity Units (whether vested or unvested) shall be automatically and immediately forfeited without consideration, unless the Award Agreement provides otherwise.

(c) Clawback and Forfeiture Upon Breach. The Plan Administrator may provide in the Award Agreement that all or a portion of the value of Phantom Equity Units (including any amounts previously paid) shall be forfeited and subject to repayment by the Participant if:

(i) the Participant breaches any non-competition, non-solicitation, confidentiality, or non-disparagement covenant;

(ii) the Participant engages in conduct that constitutes Cause, whether discovered before or after Separation from Service; or

(iii) any other forfeiture condition specified in the Award Agreement occurs.

(d) No Right to Continued Service. Nothing in this Plan or any Award Agreement shall confer upon any Participant the right to continue in the service of the Company or any Affiliate, or affect the right of the Company to terminate the Participant's service at any time, with or without Cause.

PART IV: PROFITS INTEREST UNIT PROVISIONS

Section 4.1 — Grant of Profits Interest Units

(a) Grant. The Plan Administrator may, from time to time, grant Profits Interest Units to any Eligible Person. Each grant shall be evidenced by an Award Agreement substantially in the form of Exhibit B, which shall specify:

(i) the number or percentage of Profits Interest Units granted;

(ii) the Grant Date;

(iii) the Distribution Threshold / Hurdle Amount as of the Grant Date;

(iv) the Vesting Schedule;

(v) the rights to distributions and allocations;

(vi) any forfeiture conditions;

(vii) the requirement to execute a joinder to the Operating Agreement; and

(viii) any other terms and conditions determined by the Plan Administrator.

(b) Nature of Profits Interest. Profits Interest Units are intended to constitute "profits interests" within the meaning of Revenue Procedure 93-27 and Revenue Procedure 2001-43, such that:

(i) as of the Grant Date, the Participant would receive no proceeds if the Company's assets were sold at Fair Market Value and the proceeds were distributed in complete liquidation of the Company immediately following such hypothetical sale; and

(ii) the Participant's rights are limited to a share of future profits and appreciation in value of the Company above the Distribution Threshold / Hurdle Amount.

(c) Membership Interest. Upon the grant of Profits Interest Units, the Participant shall be admitted as a member of the Company (if not already a member) and shall execute a joinder to the Operating Agreement. The Participant shall be treated as a partner of the Company for federal income tax purposes from and after the Grant Date, regardless of whether the Profits Interest Units are vested or unvested.

(d) Class of Interest. Profits Interest Units shall constitute a separate class of membership interest in the Company (e.g., "Class B Units" or "Incentive Units"), as set forth in the Operating Agreement or an amendment thereto.

Section 4.2 — Distribution Threshold / Hurdle Amount

(a) Establishment. The Distribution Threshold / Hurdle Amount for each grant of Profits Interest Units shall be equal to the Fair Market Value of the Company as of the Grant Date, as determined by the Plan Administrator based on a contemporaneous valuation of the Company. This threshold ensures that the Profits Interest Units have zero value on the Grant Date and qualify for the Rev. Proc. 93-27 safe harbor.

(b) Documentation. The Company shall maintain written documentation of the valuation methodology and the Fair Market Value determination used to establish the Distribution Threshold for each grant. Such documentation shall be sufficient to withstand IRS scrutiny and shall be prepared contemporaneously with the grant.

(c) Adjustments. The Distribution Threshold shall not be adjusted after the Grant Date except as expressly provided in the Operating Agreement (e.g., adjustments for capital contributions by other members, recapitalizations, or similar events that do not reflect appreciation in the underlying business).

Section 4.3 — Capital Account and Allocation Mechanics

(a) Capital Account. A Capital Account shall be established for each holder of Profits Interest Units in accordance with Treasury Regulation § 1.704-1(b)(2)(iv). The initial Capital Account balance for Profits Interest Units shall be zero ($0) on the Grant Date.

(b) Allocations of Profits and Losses. Allocations of income, gain, loss, deduction, and credit to holders of Profits Interest Units shall be made in accordance with the allocation provisions of the Operating Agreement, which shall be drafted to comply with the substantial economic effect requirements of Section 704(b) and Treasury Regulation § 1.704-1(b).

(c) Distribution Waterfall. Distributions with respect to Profits Interest Units shall be made in accordance with the following priority (or as otherwise specified in the Operating Agreement):

(i) First, to holders of capital interests (e.g., Class A Members), until such holders have received distributions equal to their aggregate Capital Account balances, including their share of all pre-grant appreciation (i.e., the Distribution Threshold);

(ii) Second, to holders of Profits Interest Units, in proportion to their respective Profits Interest Unit percentages, with respect to the excess of the total distributable amount over the Distribution Threshold; and

(iii) Third, any remaining amounts distributed pro rata among all members (including Profits Interest Unit holders) in accordance with their respective overall membership percentages as set forth in the Operating Agreement.

(d) Tax Distributions. The Company shall endeavor to make quarterly or annual "tax distributions" to all members (including holders of Profits Interest Units) in an amount sufficient to cover each member's estimated federal and state income tax liability attributable to allocations of income from the Company, calculated at the highest marginal individual income tax rate applicable in the state of the Company's principal place of business.

(e) Consistency with Operating Agreement. All Capital Account, allocation, and distribution provisions of this Plan are subject to the terms of the Operating Agreement, which shall control in the event of any conflict. The Operating Agreement shall be amended as necessary to reflect grants of Profits Interest Units under this Plan.

Section 4.4 — Section 83(b) Election for Profits Interest Units

(a) Protective Election Recommended. Each Participant who receives Profits Interest Units is strongly recommended to file an election under Section 83(b) of the Code with respect to such Profits Interest Units (a "Protective 83(b) Election"), regardless of whether the Profits Interest Units are subject to a Vesting Schedule.

(b) Purpose. The Protective 83(b) Election serves to:

(i) establish that the Participant recognizes zero ($0) ordinary income on the Grant Date (since the Profits Interest Units have no liquidation value as of the Grant Date);

(ii) protect the Participant in the event that the IRS determines that the safe harbor under Revenue Procedure 93-27 does not apply;

(iii) commence the holding period for long-term capital gains treatment as of the Grant Date (rather than the vesting date); and

(iv) commence the statute of limitations period for IRS review of the grant.

(c) Filing Requirements. To be effective, the Section 83(b) election must be:

(i) filed with the Internal Revenue Service within thirty (30) days after the Grant Date;

(ii) a copy provided to the Company;

(iii) a copy attached to the Participant's federal income tax return for the taxable year that includes the Grant Date; and

(iv) if the Participant is married and files a joint return, signed by both spouses.

(d) Company Assistance. The Company shall provide each Participant with a form of Section 83(b) election letter and instructions at the time of grant. A sample election letter is included in Exhibit B.

(e) Consequences of Failure to File. If a Participant fails to file a timely Section 83(b) election:

(i) the Participant may be required to recognize ordinary income upon the vesting of the Profits Interest Units equal to the Fair Market Value of such Units at the time of vesting;

(ii) the holding period for capital gains purposes will not commence until the vesting date; and

(iii) the Participant may lose the benefit of the Rev. Proc. 93-27 safe harbor with respect to unvested interests.

WARNING: The thirty (30)-day filing deadline for a Section 83(b) election is strictly enforced. There is no extension or relief available for a missed filing deadline. Participants should file the election immediately upon receipt of Profits Interest Units.

Section 4.5 — Tax Reporting for Profits Interest Units

(a) Schedule K-1. The Company shall issue a Schedule K-1 (Form 1065) to each holder of Profits Interest Units, reporting the holder's allocable share of income, gain, loss, deduction, and credit for each taxable year, regardless of whether any distributions are made.

(b) Partner Status. Each holder of Profits Interest Units shall be treated as a partner of the Company for federal income tax purposes from and after the Grant Date. The Participant's compensation from the Company shall be reported as guaranteed payments or distributive share (as applicable) rather than wages.

(c) Self-Employment Tax. Holders of Profits Interest Units may be subject to self-employment tax on their allocable share of the Company's trade or business income, as determined under Section 1402(a) of the Code. Participants should consult with their own tax advisors.

(d) Estimated Tax Payments. Because the Company will not withhold income taxes from allocations or distributions to holders of Profits Interest Units, each holder shall be solely responsible for making estimated tax payments as required by federal and applicable state law.

(e) State Tax Considerations. Holders of Profits Interest Units may have state income tax filing and payment obligations in each state in which the Company conducts business or generates income. The Operating Agreement may include composite return and withholding provisions for non-resident members.

Section 4.6 — Forfeiture of Profits Interest Units

(a) Unvested Units. Any Profits Interest Units that have not vested as of the date of a Participant's Separation from Service shall be automatically forfeited, and the Participant's membership interest in the Company shall be correspondingly reduced without any consideration. Upon forfeiture, the Capital Account associated with such forfeited Units shall be reallocated in accordance with the Operating Agreement.

(b) Forfeiture for Cause. If a Participant's service is terminated for Cause, all Profits Interest Units (whether vested or unvested) may be repurchased by the Company at the lesser of (i) the Participant's Capital Account balance attributable to such Units, or (ii) Fair Market Value, as determined by the Plan Administrator in its sole discretion. The Award Agreement shall specify whether termination for Cause results in automatic forfeiture of all Units or only unvested Units.

(c) Repurchase Right. Upon a Participant's Separation from Service (other than for Cause), the Company shall have a call right to repurchase vested Profits Interest Units at Fair Market Value, exercisable within [____] days following the Separation from Service, on such payment terms as set forth in the Award Agreement.

(d) Restrictive Covenant Clawback. The Award Agreement may provide that if a Participant violates any non-competition, non-solicitation, confidentiality, or non-disparagement covenant, all Profits Interest Units (whether vested or unvested) shall be subject to forfeiture and/or repurchase at cost ($0).

PART V: VESTING

Section 5.1 — Vesting Schedules

(a) General. Each Award shall be subject to a Vesting Schedule as determined by the Plan Administrator and set forth in the applicable Award Agreement. The Plan Administrator may, in its sole discretion, select from the following vesting structures or any combination thereof:

(b) Time-Based Vesting Options.

Option 1: Four-Year Vesting with One-Year Cliff

Option 2: Three-Year Ratable Vesting

Option 3: Five-Year Ratable Vesting

Option 4: Custom Vesting Schedule

(c) Performance-Based Vesting. The Plan Administrator may condition the vesting of all or a portion of an Award on the achievement of specified performance goals, including but not limited to:

☐ Revenue targets: [________________________________]

☐ EBITDA targets: [________________________________]

☐ Net income targets: [________________________________]

☐ Customer/client acquisition targets: [________________________________]

☐ Product development milestones: [________________________________]

☐ Operational efficiency metrics: [________________________________]

☐ Other: [________________________________]

(d) Hybrid Vesting. Awards may combine time-based and performance-based vesting components (e.g., 50% time-based over four years and 50% upon achievement of specified EBITDA targets).

Section 5.2 — Acceleration of Vesting

(a) Change of Control Acceleration. The Award Agreement shall specify whether vesting accelerates upon a Change of Control. The Plan Administrator may provide for:

☐ Single-Trigger Acceleration — All unvested Units automatically vest upon the consummation of a Change of Control.

☐ Double-Trigger Acceleration — All unvested Units automatically vest only if (i) a Change of Control occurs AND (ii) the Participant's service is terminated without Cause or the Participant resigns for Good Reason within [____] months following the Change of Control.

☐ Partial Acceleration — [____]% of unvested Units vest upon the Change of Control, with the remainder subject to continued vesting or double-trigger acceleration.

☐ No Acceleration — Vesting continues on the original schedule, with the acquiring entity assuming or substituting the Awards.

(b) Death or Disability. Unless otherwise provided in the Award Agreement:

(i) Upon the Participant's death, [____]% of unvested Units shall immediately vest; and

(ii) Upon the Participant's Disability, [____]% of unvested Units shall immediately vest.

(c) Discretionary Acceleration. The Plan Administrator may, in its sole discretion, accelerate the vesting of any Award at any time and for any reason.

PART VI: CHANGE OF CONTROL PROVISIONS

Section 6.1 — Effect of Change of Control on Phantom Equity Units

(a) Payment upon Change of Control. Unless the Award Agreement provides otherwise, upon a Change of Control, all vested Phantom Equity Units shall be settled in a lump-sum cash payment within sixty (60) days following the consummation of the Change of Control, based on the per-unit value implied by the Change of Control transaction.

(b) Assumption or Substitution. In connection with a Change of Control, the acquiring or surviving entity may assume or substitute Awards on equivalent economic terms. If Awards are not assumed or substituted, all unvested Phantom Equity Units shall automatically vest immediately prior to the consummation of the Change of Control.

(c) Valuation. The Unit Value for purposes of a Change of Control payout shall be determined based on the total consideration paid or payable in the Change of Control transaction, divided by the total number of outstanding membership units (or their equivalent) on a fully diluted basis, subject to adjustments for transaction expenses, escrow holdbacks, and earnout provisions as determined by the Plan Administrator in good faith.

Section 6.2 — Effect of Change of Control on Profits Interest Units

(a) Participation in Transaction Proceeds. Upon a Change of Control, holders of vested Profits Interest Units shall be entitled to receive their proportionate share of the transaction proceeds in accordance with the distribution waterfall set forth in the Operating Agreement, subject to the Distribution Threshold / Hurdle Amount.

(b) Assumption or Conversion. If the Change of Control involves a conversion of the Company from an LLC to a corporation (or a merger into a corporation), the Plan Administrator may, in its discretion:

(i) convert Profits Interest Units into economically equivalent equity awards of the surviving corporation (e.g., restricted stock units or stock options);

(ii) cash out the Profits Interest Units at Fair Market Value; or

(iii) provide for continued treatment under the surviving entity's operating agreement.

(c) Unvested Profits Interest Units. The treatment of unvested Profits Interest Units upon a Change of Control shall be as specified in the Award Agreement, subject to Section 5.2(a) (Acceleration of Vesting).

Section 6.3 — Parachute Payment Limitations

(a) No Excess Parachute Payments. If any payment or benefit under this Plan, together with any other payments or benefits received by a Participant, would constitute an "excess parachute payment" within the meaning of Section 280G of the Code (if the Company were a corporation subject to Section 280G), the Plan Administrator may, in its sole discretion, reduce the aggregate payments to the Participant to the extent necessary to avoid such excess parachute payment, unless the Award Agreement provides for a gross-up or other treatment.

(b) Note. Section 280G generally does not apply to partnerships and LLCs taxed as partnerships; however, this provision is included as a protective measure in the event the Company converts to corporate form or is otherwise subject to Section 280G.

PART VII: TERMINATION OF SERVICE PROVISIONS

Section 7.1 — Termination Without Cause or Resignation for Good Reason

(a) Phantom Equity Units. Upon a Participant's Separation from Service without Cause or resignation for Good Reason:

(i) all vested Phantom Equity Units shall be settled in accordance with Section 3.4;

(ii) all unvested Phantom Equity Units shall be forfeited without consideration; and

(iii) any additional acceleration or enhanced benefits shall be as set forth in the Award Agreement.

(b) Profits Interest Units. Upon a Participant's Separation from Service without Cause or resignation for Good Reason:

(i) all vested Profits Interest Units shall be retained by the Participant, subject to the Company's repurchase right under Section 4.6(c);

(ii) all unvested Profits Interest Units shall be forfeited and the Participant's membership interest correspondingly reduced; and

(iii) the Participant shall continue to receive allocations and distributions with respect to vested Profits Interest Units until such Units are repurchased or redeemed.

Section 7.2 — Termination for Cause

(a) Phantom Equity Units. Upon a Participant's Separation from Service for Cause:

(i) all Phantom Equity Units (whether vested or unvested) shall be automatically forfeited without consideration; and

(ii) any previously paid amounts may be subject to clawback as provided in Section 3.5(c).

(b) Profits Interest Units. Upon a Participant's Separation from Service for Cause:

(i) all unvested Profits Interest Units shall be automatically forfeited;

(ii) all vested Profits Interest Units shall be subject to repurchase by the Company at the lesser of Capital Account balance or Fair Market Value (or at $0, if so specified in the Award Agreement); and

(iii) any previously distributed amounts may be subject to clawback as provided in Section 4.6(d).

Section 7.3 — Voluntary Resignation Without Good Reason

(a) Phantom Equity Units. Upon a Participant's voluntary Separation from Service without Good Reason:

(i) all vested Phantom Equity Units shall be settled in accordance with Section 3.4; and

(ii) all unvested Phantom Equity Units shall be forfeited without consideration.

(b) Profits Interest Units. Upon a Participant's voluntary Separation from Service without Good Reason:

(i) all vested Profits Interest Units shall be retained by the Participant, subject to the Company's repurchase right; and

(ii) all unvested Profits Interest Units shall be forfeited.

Section 7.4 — Death or Disability

(a) Phantom Equity Units. Upon a Participant's death or Disability:

(i) unvested Phantom Equity Units shall vest as provided in Section 5.2(b);

(ii) all vested Phantom Equity Units (including any newly vested Units) shall be settled in a lump-sum cash payment within sixty (60) days; and

(iii) payment shall be made to the Participant (in the case of Disability) or to the Participant's designated beneficiary or estate (in the case of death).

(b) Profits Interest Units. Upon a Participant's death or Disability:

(i) unvested Profits Interest Units shall vest as provided in Section 5.2(b);

(ii) all vested Profits Interest Units shall be retained by the Participant (or the Participant's estate or designated beneficiary); and

(iii) the Company's repurchase right shall apply, with payment made to the Participant, the estate, or the designated beneficiary.

Section 7.5 — Retirement

The Plan Administrator may establish retirement provisions in individual Award Agreements, including enhanced vesting, extended payout periods, or continued participation in distributions, as determined in the Plan Administrator's sole discretion.

PART VIII: VALUATION METHODOLOGY

Section 8.1 — Valuation Methods

The Fair Market Value of the Company shall be determined using one or more of the following methods, as selected by the Plan Administrator in its reasonable discretion and documented in writing:

(a) Income Approach. Discounted cash flow analysis or capitalization of earnings, using:

(i) projected free cash flows for a period of [____] years;

(ii) a terminal value based on a perpetuity growth rate or exit multiple;

(iii) a discount rate reflecting the Company's weighted average cost of capital; and

(iv) adjustments for non-operating assets, excess working capital, and company-specific risk.

(b) Market Approach. Comparable company analysis or comparable transaction analysis, using:

(i) publicly traded companies with similar business models, industry, and size;

(ii) recent private transactions involving comparable companies;

(iii) revenue, EBITDA, or earnings multiples; and

(iv) adjustments for differences in size, growth, profitability, and risk.

(c) Asset Approach. Net asset value or adjusted book value, appropriate for asset-holding companies.

(d) Formula Method. The following formula shall apply unless superseded by an independent appraisal:

Equity Value = [____] x Trailing Twelve-Month EBITDA, less outstanding indebtedness, plus cash and cash equivalents

or

Equity Value = [____] x Trailing Twelve-Month Revenue

or

Equity Value = [________________________________] (custom formula)

(e) Discounts and Premiums. The Plan Administrator shall determine whether the following discounts or premiums apply:

☐ Discount for Lack of Marketability (DLOM): [____]%

☐ Discount for Lack of Control (DLOC): [____]%

☐ Control Premium: [____]%

☐ No discounts or premiums shall apply

See Exhibit C for the detailed Valuation Methodology.

PART IX: SECTION 409A COMPLIANCE

Section 9.1 — Intent to Comply

(a) This Plan and all Awards granted hereunder are intended either to be exempt from or to comply with the requirements of Section 409A and shall be construed, administered, and interpreted in accordance with such intent. To the extent that any provision of this Plan or any Award Agreement is ambiguous as to its compliance with Section 409A, the provision shall be read in such manner so that all payments hereunder are either exempt from or comply with Section 409A.

(b) Notwithstanding any provision of this Plan to the contrary, in the event that the Plan Administrator determines that any amount payable under the Plan may be subject to Section 409A, the Plan Administrator may adopt such amendments to the Plan and the applicable Award Agreement, or take such other actions, as the Plan Administrator deems necessary or appropriate to (i) exempt such amount from Section 409A, or (ii) comply with the requirements of Section 409A; provided, however, that no such action shall adversely affect the Participant's rights without the Participant's written consent.

Section 9.2 — Applicability to Award Types

(a) Phantom Equity Units. Phantom Equity Units constitute deferred compensation subject to Section 409A unless an exemption applies. The following exemptions may be available:

☐ Short-Term Deferral Exemption (Treas. Reg. § 1.409A-1(b)(4)) — If payment is made no later than the 15th day of the third month following the later of (i) the end of the Participant's taxable year in which the right to payment is no longer subject to a substantial risk of forfeiture, or (ii) the end of the Company's taxable year in which the right to payment is no longer subject to a substantial risk of forfeiture.

☐ Separation Pay Exemption (Treas. Reg. § 1.409A-1(b)(9)) — If the total amount payable upon Separation from Service does not exceed two times the lesser of (i) the Participant's annualized compensation, or (ii) the limit under Section 401(a)(17) of the Code.

(b) Profits Interest Units. Profits Interest Units are generally not subject to Section 409A because they constitute actual equity interests in the Company rather than deferred compensation arrangements. However, certain features of a Profits Interest Unit award may cause it to be treated as deferred compensation (e.g., mandatory redemption features, put rights, or guaranteed payments). The Plan Administrator shall ensure that Profits Interest Unit awards do not include features that would cause them to be treated as deferred compensation under Section 409A.

Section 9.3 — Section 409A Operational Requirements

To the extent that any Phantom Equity Unit award constitutes deferred compensation subject to Section 409A:

(a) Written Plan Document. This Plan and each Award Agreement shall constitute the written plan document required by Treasury Regulation § 1.409A-1(c).

(b) Initial Deferral Election. Any election to defer payment must be made no later than the close of the Participant's taxable year preceding the year in which the services giving rise to the compensation are performed, or within thirty (30) days of the Participant's initial eligibility to participate in the Plan (with respect to compensation for services to be performed after the election), as provided in Treasury Regulation § 1.409A-2.

(c) Permissible Payment Events. Payments shall be made only upon one or more of the six permissible payment events under Section 409A: (i) Separation from Service, (ii) Disability, (iii) death, (iv) a specified time or fixed schedule, (v) a change in control event (as defined in Treas. Reg. § 1.409A-3(i)(5)), or (vi) an unforeseeable emergency.

(d) No Acceleration of Payments. The Company shall not accelerate the time or schedule of any payment under the Plan except as expressly permitted by Treasury Regulation § 1.409A-3(j)(4).

(e) Specified Employee Delay. Payments to Specified Employees upon Separation from Service shall be delayed for six (6) months as required by Section 409A(a)(2)(B)(i), as set forth in Section 3.4(c).

Section 9.4 — Section 409A Penalties

(a) Consequences of Non-Compliance. If any payment under this Plan fails to comply with or be exempt from Section 409A, the Participant may be subject to:

(i) immediate inclusion of all deferred amounts in gross income;

(ii) a twenty percent (20%) additional tax on such amounts under Section 409A(a)(1)(B); and

(iii) premium interest tax under Section 409A(a)(1)(B)(ii).

(b) No Guarantee. The Company does not guarantee that any payments under the Plan will be exempt from or compliant with Section 409A. Each Participant is solely responsible for the tax consequences of Awards granted under the Plan and is encouraged to consult with a qualified tax advisor.

PART X: TAX WITHHOLDING AND REPORTING

Section 10.1 — Phantom Equity Units — Withholding

(a) Withholding Obligation. The Company shall withhold from any payment with respect to Phantom Equity Units all amounts required to be withheld under applicable federal, state, and local income tax and employment tax laws, including but not limited to:

(i) federal income tax withholding;

(ii) FICA taxes (Social Security and Medicare, including the Additional Medicare Tax under Section 3101(b)(2));

(iii) state and local income tax withholding; and

(iv) any other applicable taxes.

(b) FICA Timing. For purposes of FICA taxes, amounts deferred under Phantom Equity Unit awards become "wages" at the later of (i) the date services are performed or (ii) the date on which the right to payment is no longer subject to a substantial risk of forfeiture, in accordance with Treasury Regulation § 31.3121(v)(2)-1.

(c) Reporting. Payments with respect to Phantom Equity Units shall be reported on the Participant's Form W-2 (if the Participant is an employee) or Form 1099-NEC (if the Participant is an independent contractor).

Section 10.2 — Profits Interest Units — Tax Treatment

(a) No Withholding at Grant. No income tax or employment tax withholding is required at the time of grant of Profits Interest Units that qualify under the Rev. Proc. 93-27 safe harbor (assuming a timely Protective 83(b) Election is filed, if applicable).

(b) K-1 Reporting. Each holder of Profits Interest Units shall receive an annual Schedule K-1 reporting the holder's allocable share of the Company's income, gain, loss, deductions, and credits. The Company shall not withhold taxes from allocations or distributions unless required by applicable state law for non-resident members.

(c) Guaranteed Payments. If a holder of Profits Interest Units also receives guaranteed payments (e.g., salary-equivalent payments) under the Operating Agreement, such payments shall be subject to self-employment tax and reported on Schedule K-1.

(d) State Withholding for Non-Residents. The Company may be required to withhold state income taxes on behalf of Profits Interest Unit holders who are non-residents of the state(s) in which the Company conducts business. The Company shall comply with all applicable state composite return and withholding requirements.

PART XI: GENERAL PROVISIONS

Section 11.1 — Transferability

(a) Phantom Equity Units. Phantom Equity Units are not transferable by the Participant other than by will or the laws of descent and distribution or to a Participant's revocable trust for estate planning purposes, with the prior written consent of the Plan Administrator.

(b) Profits Interest Units. Profits Interest Units are not transferable by the Participant except as permitted by the Operating Agreement, which shall include customary restrictions on transfer including:

(i) right of first refusal in favor of the Company;

(ii) prohibition on transfers to competitors;

(iii) requirement of Plan Administrator consent; and

(iv) compliance with applicable securities laws.

Section 11.2 — No Right to Continued Service

Nothing in this Plan or any Award Agreement shall confer upon any Participant the right to continue in the service of the Company or affect the right of the Company to terminate such service at any time, with or without Cause, subject to any separate employment or service agreement.

Section 11.3 — Amendment and Termination of Plan

(a) Amendment. The Board may amend, modify, or supplement this Plan at any time, in whole or in part; provided, however, that no amendment shall, without the written consent of the affected Participant, materially and adversely affect the rights of such Participant with respect to any outstanding Award.

(b) Termination. The Board may terminate the Plan at any time. Termination of the Plan shall not affect any Awards previously granted, which shall continue in accordance with their terms. Notwithstanding the foregoing, no termination of the Plan shall accelerate the payment of Phantom Equity Units except as permitted by Treasury Regulation § 1.409A-3(j)(4)(ix) (plan termination and liquidation).

(c) Section 409A Compliance. Any amendment or termination of the Plan shall be made in compliance with Section 409A, and no amendment shall cause any Award that is exempt from Section 409A to become subject to Section 409A.

Section 11.4 — Governing Law

This Plan shall be governed by and construed in accordance with the laws of the State of [________________________________], without regard to its conflict of laws principles. Any dispute arising under or in connection with this Plan shall be resolved by:

☐ Binding arbitration in [________________________________] under the rules of the American Arbitration Association

☐ Litigation in the state or federal courts located in [________________________________]

Section 11.5 — Entire Agreement

This Plan, together with the applicable Award Agreement and the Operating Agreement, constitutes the entire agreement between the Company and each Participant with respect to the subject matter hereof and supersedes all prior agreements, representations, and understandings, whether written or oral.

Section 11.6 — Severability

If any provision of this Plan or any Award Agreement is held to be invalid, illegal, or unenforceable, the remaining provisions shall continue in full force and effect, and the invalid provision shall be reformed to the minimum extent necessary to make it valid and enforceable.

Section 11.7 — Notices

All notices, requests, demands, and other communications under this Plan shall be in writing and shall be delivered personally, by certified mail (return receipt requested), or by nationally recognized overnight courier to:

If to the Company:

[________________________________]
[________________________________]
[________________________________]
Attention: [________________________________]
Email: [________________________________]

If to the Participant:

At the address set forth in the applicable Award Agreement or most recently provided by the Participant in writing to the Company.

Section 11.8 — Successors and Assigns

This Plan shall be binding upon and inure to the benefit of the Company, its successors and assigns, and each Participant, and the Participant's heirs, executors, administrators, and legal representatives.

Section 11.9 — Clawback Policy

All Awards under this Plan shall be subject to any clawback, recoupment, or forfeiture policy adopted by the Company from time to time, to the extent applicable.

Section 11.10 — Securities Law Compliance

The grant of Profits Interest Units under this Plan may constitute the offer and sale of securities under federal and state securities laws. The Company shall ensure compliance with all applicable securities law exemptions, including but not limited to:

(i) Section 4(a)(2) of the Securities Act of 1933;

(ii) Rule 506(b) or 506(c) of Regulation D; and

(iii) Applicable state blue sky law exemptions.

Each Participant may be required to execute customary investment representations and acknowledgments.

ADOPTION AND EXECUTION

IN WITNESS WHEREOF, the Company has caused this Plan to be adopted by the undersigned, duly authorized, as of the date first set forth above.

COMPANY:

[________________________________] LLC

By: [________________________________]

Name: [________________________________]

Title: [________________________________]

Date: [__/__/____]

ACKNOWLEDGED AND APPROVED:

☐ Managing Member(s)
☐ Board of Managers
☐ Required Member Vote (per Operating Agreement)

Signature(s) of Approving Authority:

____________________________________________

Name: [________________________________]

Title: [________________________________]

Date: [__/__/____]

____________________________________________

Name: [________________________________]

Title: [________________________________]

Date: [__/__/____]

EXHIBIT A: PHANTOM EQUITY UNIT AWARD AGREEMENT

PHANTOM EQUITY UNIT AWARD AGREEMENT

Under the Phantom Equity / Profits Interest Incentive Plan of [________________________________] LLC

Custom Vesting Schedule (if Option 4 selected):

Terms and Conditions

1. Grant. The Company hereby grants to the Participant the number of Phantom Equity Units set forth above, subject to the terms and conditions of this Award Agreement and the Plan. Capitalized terms not defined herein shall have the meanings set forth in the Plan.

2. No Ownership Interest. The Participant acknowledges that Phantom Equity Units do not represent actual membership interests, equity, or ownership in the Company. The Participant shall have no voting rights, management rights, distribution rights (except DERs, if applicable), or other rights of a member of the Company by reason of this Award.

3. Vesting. The Phantom Equity Units shall vest in accordance with the Vesting Schedule set forth above, subject to the Participant's continuous service to the Company through each applicable vesting date.

4. Payment. Upon the occurrence of a Payout Trigger Event, the Company shall pay the Participant the value of all vested Phantom Equity Units in accordance with Section 3.4 of the Plan. The Participant's right to payment is an unfunded, unsecured general obligation of the Company.

5. Forfeiture. Unvested Phantom Equity Units shall be forfeited upon the Participant's Separation from Service. In the event of termination for Cause, all Units (including vested Units) shall be forfeited as set forth above.

6. Restrictive Covenants. The Participant agrees to comply with the non-competition, non-solicitation, and confidentiality covenants set forth in this Award Agreement and any separate restrictive covenant agreement between the Participant and the Company.

7. Section 409A. This Award Agreement is intended to comply with or be exempt from Section 409A. The Participant acknowledges that the Company does not guarantee the tax treatment of any Award and that the Participant is solely responsible for the Participant's own tax obligations.

8. Tax Withholding. The Company shall withhold from any payment all applicable taxes as required by law.

9. Governing Law. This Award Agreement shall be governed by the laws of the State of [________________________________].

10. Entire Agreement. This Award Agreement, together with the Plan, constitutes the entire agreement between the parties with respect to the subject matter hereof.

IN WITNESS WHEREOF, the parties have executed this Award Agreement as of the Grant Date.

COMPANY:

[________________________________] LLC

By: _________________________________________

Name: [________________________________]

Title: [________________________________]

Date: [__/__/____]

PARTICIPANT:

_________________________________________

Name: [________________________________]

Date: [__/__/____]

EXHIBIT B: PROFITS INTEREST UNIT AWARD AGREEMENT

PROFITS INTEREST UNIT AWARD AGREEMENT

Under the Phantom Equity / Profits Interest Incentive Plan of [________________________________] LLC

Custom Vesting Schedule (if Option 4 selected):

Terms and Conditions

1. Grant of Profits Interest. The Company hereby grants to the Participant the Profits Interest Units set forth above, intended to qualify as a "profits interest" within the meaning of IRS Revenue Procedure 93-27 and Revenue Procedure 2001-43. The Participant acknowledges that these Units would have no value if the Company's assets were sold at Fair Market Value on the Grant Date and the proceeds distributed in complete liquidation.

2. Admission as Member. Upon execution of this Award Agreement, the Participant shall be admitted as a member of the Company (if not already a member) and shall execute a joinder to the Company's Operating Agreement. From and after the Grant Date, the Participant shall be treated as a partner of the Company for federal income tax purposes.

3. Capital Account. A Capital Account shall be established for the Participant with an initial balance of $0.00 as of the Grant Date, maintained in accordance with Treasury Regulation § 1.704-1(b)(2)(iv).

4. Distribution Threshold. The Participant shall be entitled to share in distributions and allocations only to the extent that the total distributable amount exceeds the Distribution Threshold / Hurdle Amount set forth above, in accordance with the distribution waterfall provisions of the Operating Agreement.

5. Vesting. The Profits Interest Units shall vest in accordance with the Vesting Schedule set forth above, subject to the Participant's continuous service to the Company through each applicable vesting date. Notwithstanding the vesting schedule, the Participant shall be treated as a partner from the Grant Date for tax reporting purposes.

6. Section 83(b) Election. The Participant acknowledges the recommendation to file a Protective Section 83(b) Election within thirty (30) days of the Grant Date. A form of election letter is attached to this Award Agreement.

7. Tax Reporting. The Participant acknowledges and agrees that:

(a) the Participant will receive a Schedule K-1 (Form 1065) rather than a Form W-2 with respect to income allocable to the Profits Interest Units;

(b) the Participant is solely responsible for making estimated tax payments;

(c) the Participant may have state income tax filing obligations in states where the Company conducts business; and

(d) the Participant is encouraged to consult with a qualified tax advisor regarding the tax consequences of this Award.

8. Forfeiture. Unvested Profits Interest Units shall be forfeited upon the Participant's Separation from Service, and the Participant's membership interest shall be correspondingly reduced. Upon a termination for Cause, the treatment shall be as specified above.

9. Repurchase Right. Upon the Participant's Separation from Service, the Company shall have the right (but not the obligation) to repurchase all vested Profits Interest Units at Fair Market Value, exercisable within the period specified above.

10. Transfer Restrictions. The Participant shall not sell, transfer, pledge, hypothecate, or otherwise dispose of any Profits Interest Units except as permitted by the Operating Agreement and with the prior written consent of the Plan Administrator.

11. Rev. Proc. 93-27 Safe Harbor Covenants. The Participant covenants and agrees:

(a) not to dispose of the Profits Interest Units within two (2) years of the Grant Date;

(b) that the Profits Interest Units do not relate to a substantially certain and predictable stream of income from partnership assets;

(c) that the Profits Interest Units are not a limited partnership interest in a publicly traded partnership; and

(d) to cooperate with the Company in all matters necessary to maintain the qualification of the Profits Interest Units under Revenue Procedure 93-27 and Revenue Procedure 2001-43.

12. Governing Law. This Award Agreement shall be governed by the laws of the State of [________________________________].

13. Entire Agreement. This Award Agreement, together with the Plan and the Operating Agreement, constitutes the entire agreement between the parties with respect to the subject matter hereof.

IN WITNESS WHEREOF, the parties have executed this Award Agreement as of the Grant Date.

COMPANY:

[________________________________] LLC

By: _________________________________________

Name: [________________________________]

Title: [________________________________]

Date: [__/__/____]

PARTICIPANT:

_________________________________________

Name: [________________________________]

Date: [__/__/____]

ATTACHMENT TO EXHIBIT B: PROTECTIVE SECTION 83(b) ELECTION

ELECTION UNDER SECTION 83(b) OF THE INTERNAL REVENUE CODE OF 1986

The undersigned taxpayer hereby elects, pursuant to Section 83(b) of the Internal Revenue Code of 1986, as amended, and Treasury Regulation § 1.83-2, to include in gross income for the taxable year of transfer the excess (if any) of the fair market value of the property described below over the amount paid for such property.

1. Taxpayer Information:

2. Description of Property:

The property with respect to which this election is being made consists of [________________________________] Profits Interest Units (the "Units") in [________________________________] LLC, a [________________________________] limited liability company (the "Company"), received in connection with the performance of services.

3. Date of Transfer:

[__/__/____] (the Grant Date)

4. Taxable Year of Transfer:

Calendar year [____]

5. Nature of Restrictions:

The Units are subject to a substantial risk of forfeiture in the form of a time-based and/or performance-based vesting schedule as set forth in the Profits Interest Unit Award Agreement between the undersigned and the Company dated [__/__/____]. Unvested Units are subject to forfeiture upon the undersigned's termination of service with the Company.

6. Fair Market Value at Time of Transfer:

The fair market value of the Units as of the Grant Date is $0.00. The Units constitute a "profits interest" within the meaning of IRS Revenue Procedure 93-27, and as such would have no liquidation value if the Company's assets were sold at fair market value on the Grant Date and the proceeds were distributed in complete liquidation.

7. Amount Paid for Property:

$0.00

8. Amount to Include in Gross Income:

$0.00 ($0.00 fair market value minus $0.00 amount paid)

9. Filing and Delivery:

This election is being filed with the Internal Revenue Service within thirty (30) days of the date of transfer. A copy of this election is being:

☐ Filed with the Internal Revenue Service office where the undersigned files annual income tax returns

☐ Provided to [________________________________] LLC

☐ Attached to the undersigned's federal income tax return for the taxable year that includes the date of transfer

The undersigned understands that this election, once made, is irrevocable except with the consent of the Commissioner of Internal Revenue.

Taxpayer Signature:

_________________________________________

Name: [________________________________]

Date: [__/__/____]

Spouse Signature (if joint return):

_________________________________________

Name: [________________________________]

Date: [__/__/____]

FILING INSTRUCTIONS:

1. Mail the original to the IRS Service Center where you file your annual return within 30 days of the Grant Date.
2. Send by certified mail, return receipt requested, and retain the receipt as proof of timely filing.
3. Provide a copy to [________________________________] LLC.
4. Attach a copy to your federal income tax return for the year of the grant.
5. Retain a copy for your personal records.

IRS Mailing Address:

Department of the Treasury
Internal Revenue Service Center
[________________________________] (use the address for the service center where you file your return)

EXHIBIT C: VALUATION METHODOLOGY

VALUATION METHODOLOGY AND PROCEDURES

1. Purpose

This Exhibit C sets forth the valuation methodology and procedures to be used by the Plan Administrator in determining the Fair Market Value of the Company and the Unit Value for purposes of the Plan.

2. Primary Valuation Method

The Plan Administrator has selected the following primary valuation method (check one):

☐ Independent Third-Party Appraisal. The Company shall engage a qualified independent appraiser (holding an ASA, CFA, ABV, or CVA designation) to perform a formal valuation of the Company at least annually and upon the occurrence of any Payout Trigger Event or Change of Control. The appraisal shall comply with the Uniform Standards of Professional Appraisal Practice (USPAP) and applicable IRS guidance.

☐ Formula-Based Valuation. The Equity Value shall be determined using the following formula:

Equity Value = [____] x [________________________________] (e.g., trailing twelve-month EBITDA)

Less: Outstanding indebtedness (including all interest-bearing debt, capital leases, and contingent liabilities)

Plus: Cash and cash equivalents

Plus/Minus: Other adjustments: [________________________________]

☐ Board Determination. The Board shall determine Fair Market Value in good faith, considering all relevant factors, and shall document such determination in writing. This method shall be used only for companies with limited operating history or where other methods are impracticable.

3. Valuation Adjustments

The following adjustments shall be applied to the baseline Equity Value:

(a) Normalization Adjustments:

☐ Add back owner/manager compensation in excess of market rates

☐ Add back non-recurring or extraordinary expenses

☐ Adjust for below-market or above-market rents (related-party leases)

☐ Eliminate personal expenses passed through the Company

☐ Other: [________________________________]

(b) Discounts and Premiums:

☐ Discount for Lack of Marketability (DLOM): [____]%

☐ Discount for Lack of Control (DLOC): [____]%

☐ Key Person Discount: [____]%

☐ No discounts shall apply to Change of Control valuations

☐ Other: [________________________________]

4. Valuation for Specific Events

(a) Annual Valuation. The Company shall be valued as of the last day of each fiscal year, with the valuation completed within [____] days after fiscal year-end.

(b) Payout Trigger Event Valuation. Upon a Payout Trigger Event (other than a Change of Control), the Company shall be valued as of the date of the triggering event (or the most recent fiscal year-end valuation, adjusted for material changes, at the Plan Administrator's discretion).

(c) Change of Control Valuation. Upon a Change of Control, the Unit Value shall be determined based on the per-unit consideration implied by the Change of Control transaction, after deduction of transaction expenses, escrow holdbacks, and any adjustments for earnout provisions.

(d) Profits Interest Hurdle Valuation. The Distribution Threshold / Hurdle Amount for each grant of Profits Interest Units shall be determined by a contemporaneous valuation performed as of the Grant Date. This valuation must be documented and defensible in the event of IRS audit.

5. Dispute Resolution

If a Participant disputes any valuation determination, the following process shall apply:

(a) The Participant shall provide written notice of the dispute to the Plan Administrator within thirty (30) days of receiving notice of the valuation.

(b) The Participant may, at the Participant's expense, engage a qualified independent appraiser to prepare an alternative valuation.

(c) If the Company's valuation and the Participant's valuation differ by more than [____]%, the Company and the Participant shall jointly select a third independent appraiser, whose determination shall be final and binding. The cost of the third appraiser shall be shared equally.

(d) If the Company's valuation and the Participant's valuation differ by [____]% or less, the Company's valuation shall be conclusive.

6. Record Retention

The Company shall retain all valuation reports, supporting documentation, and related correspondence for a period of not less than seven (7) years following the date of the valuation.

SOURCES AND REFERENCES

Federal Tax Authority

• IRC § 409A — Nonqualified Deferred Compensation Plans. Governs the timing of deferrals, payment triggers, and penalties for phantom equity arrangements. See Treas. Reg. §§ 1.409A-1 through 1.409A-6.

• IRC § 83 — Property Transferred in Connection with Performance of Services. Governs the taxation of property (including profits interests) received for services. See Treas. Reg. §§ 1.83-1 through 1.83-8.

• IRC § 704(b) — Partner's Distributive Share. Requires that allocations of partnership income, gain, loss, and deduction have "substantial economic effect." See Treas. Reg. § 1.704-1(b).

• IRC § 736 — Payments to a Retiring Partner or Deceased Partner's Successor in Interest.

IRS Revenue Procedures

• Rev. Proc. 93-27, 1993-2 C.B. 343 — Establishes the safe harbor providing that the receipt of a profits interest for services is not a taxable event if certain conditions are met.

• Rev. Proc. 2001-43, 2001-2 C.B. 191 — Clarifies Rev. Proc. 93-27 by providing that the safe harbor applies to both vested and unvested profits interests, provided the partnership and the service provider treat the holder as a partner from the grant date.

Key Secondary Sources

• The Tax Adviser — "Phantom Equity vs. Profit Interests: Strategic Considerations" (Oct. 2019) — Detailed comparison of phantom equity and profits interest structures with financial modeling.

• The Tax Adviser — "Profits Interests: The Most Tax-Efficient Equity Grant to Employees" (Jan. 2025) — Comprehensive guide to profits interest mechanics, hurdle amounts, and distribution waterfalls.

• RSM — "Frequently Asked Questions About Profits Interests" — Practical FAQ covering Rev. Proc. 93-27, § 83(b) elections, and capital account treatment.

• RSM — "Top 10 Frequently Asked Questions About Phantom Stock Plans" — Practical guide to phantom stock plan design, § 409A compliance, and valuation considerations.

• Krieg DeVault — "Profits Interests 101: The Basics and Uses of Profits Interests" — Overview of profits interest fundamentals and safe harbor requirements.

• The Tax Adviser — "Missed Sec. 83(b) Elections: Partnership and LLC Special Issues" (Dec. 2023) — Analysis of consequences of missed 83(b) elections for partnership interests.

• Montague Law — "Profits Interests vs. Capital Units: Why Private-Equity Sponsors Still Need the 83(b) Election" — Discussion of protective 83(b) election strategy.

• Infinite Equity — "Profit Interests & Phantom Equity: A Guide to Avoiding Accounting Pitfalls" — Accounting treatment comparison (equity-classified vs. liability-classified).

State-Specific Notes

This template is provided for informational and educational purposes only by ezel.ai and does not constitute legal, tax, or financial advice. The creation of phantom equity and profits interest incentive plans involves complex tax, securities, and partnership law issues that require the advice of qualified legal and tax professionals. Laws and regulations vary by jurisdiction and are subject to change. Always consult with a qualified attorney and tax advisor before implementing any equity compensation plan.