You can simulate the grant of options in an LLC but, for this to be readily quantifiable, it requires that the membership interests be defined as "units" rather than just a percent of the company.
Meaning that instead of saying: "Member x 33%, Member y 33%, Member z 33%," you say: Member x 333,333 units, Member y 333,333 units, Member z 333,333 units."
The operating agreement then sets forth an "authorized number of units," with some held in treasury, and option grants are then made from those treasury units. If and when the options are exercised, the units are granted, with the effect of giving ownership to the erstwhile option holder and of diluting the remaining members.
If the operating agreement is not set up to define the membership interests in the form of units, it can be amended to provide for this. There normally are no special filings associated with this - just everyone agreeing to the changes and doing a re-draft to the document.
You cannot do incentive stock options (ISOs) with an LLC and so the options would be non-qualified (NQOs). This means that, if they are not exercisable until, say, the occurrence of a liquidation event, you would be required to pay ordinary income tax on their value as of the date of such an event, i.e., the tax structure would not be particularly favorable to you.
You may also have tax complications arising from the way you are designating your payments as being in exchange for the options. On this, you do need to see an attorney. The way you guys are doing it is not ideal, as it lets the IRS put a direct measure on the value of the equity (based on the value of your billings being exchanged for it).
In general, then, it is legal to do what you are doing but it doesn't sound like it is being done in the best manner, given the goals of the parties.
I don't think there are securities law concerns here, as only certain LLC issues falls within the securities laws (remember, at its basis, an LLC is basically nothing but a traditional partnership).
All in all, though, you need to get good advice based on your particulars from an attorney who knows what he is doing. Though I am an attorney, I can't give specific advice in this type of forum. But I think the general ideas I have suggested should point you in the right general direction.
Meaning that instead of saying: "Member x 33%, Member y 33%, Member z 33%," you say: Member x 333,333 units, Member y 333,333 units, Member z 333,333 units."
The operating agreement then sets forth an "authorized number of units," with some held in treasury, and option grants are then made from those treasury units. If and when the options are exercised, the units are granted, with the effect of giving ownership to the erstwhile option holder and of diluting the remaining members.
If the operating agreement is not set up to define the membership interests in the form of units, it can be amended to provide for this. There normally are no special filings associated with this - just everyone agreeing to the changes and doing a re-draft to the document.
You cannot do incentive stock options (ISOs) with an LLC and so the options would be non-qualified (NQOs). This means that, if they are not exercisable until, say, the occurrence of a liquidation event, you would be required to pay ordinary income tax on their value as of the date of such an event, i.e., the tax structure would not be particularly favorable to you.
You may also have tax complications arising from the way you are designating your payments as being in exchange for the options. On this, you do need to see an attorney. The way you guys are doing it is not ideal, as it lets the IRS put a direct measure on the value of the equity (based on the value of your billings being exchanged for it).
In general, then, it is legal to do what you are doing but it doesn't sound like it is being done in the best manner, given the goals of the parties.
I don't think there are securities law concerns here, as only certain LLC issues falls within the securities laws (remember, at its basis, an LLC is basically nothing but a traditional partnership).
All in all, though, you need to get good advice based on your particulars from an attorney who knows what he is doing. Though I am an attorney, I can't give specific advice in this type of forum. But I think the general ideas I have suggested should point you in the right general direction.