The employees want the sale price of the company to be higher so their portion of the 5% pool will be higher. As far as incentives go, it's not much different from equity/options.
There are the tax implications. This scheme will be ordinary income and subject to FICA and income tax rather than being taxed as capital gains. By being clever they're screwing their employees out of a lot of money. Employees also can't make an 83(b) election on a bonus.
Equity encourages employees to build long-term value even if they plan on leaving the company, and act favorably to the company after leaving. A buyout lottery for current employees hurts morale and encourages people to hang on to the job for the sake of hanging on (and royally screws them tax wise).
Mainly this is an argument against ever using an LLC for a long-lived business. LLCs should be reserved for personal shell companies and companies that will be wound down at a fixed time. If this had been an S corp or C corp, they could have simply adapted an off the shelf stock option agreement.
