A corporation is a separate entity with its own liabilities for which the individual owners cannot be held personally liable. It is a concept that is old as dirt and right as rain, right? Surely everyone accepts this basic premise of doing business as a corporate entity? Well, perhaps everyone but the plaintiff’s attorney seeking to hold someone with deep pockets financially responsible for his client’s injuries.
As founders, you are likely very familiar with the multitude of obstacles that a successful venture must overcome: financing, management, creation and protection of valuable intellectual property, marketing, and building profitable and sustainable customer relationships. Another obstacle that is well known yet rarely labeled as such is “complexity.” In building a new venture, the old adage “keep it simple” remains an important philosophy.
A company’s culture is often established in its earliest days. Once ingrained, it can be very difficult to change. Although many founders recognize the importance of infusing a culture of giving into their enterprises, they wonder how they can go about it with limited time and resources. The answer should be apparent to every founder. Early stage companies can meet cultural challenges with the same tactics they use for meeting operational challenges with limited cash. When early stage companies don’t have cash, they apply “sweat” or “equity.” How do you apply “sweat” and “equity” to establish a culture of giving?
At one time or another, most startup companies work with a consultant or enter a contract with a strategic partner and are presented with a dilemma: should the company offer equity to the consultant or strategic partner in payment for services?
One of the most common conversations I have with the founders of businesses involves how they determined a way to split the ownership amongst themselves. It is probably the first difficult decision new partners face together in starting a company. In many instances, the new founders decide that they are going to split ownership equally.
Founding a company can be an overwhelming experience, but for those founders looking to raise capital from angel or venture capital investors, deciding where to incorporate and selecting an entity type are two choices that deserve careful consideration.
Many startup owners, in the early days as the sole owner, may feel tempted to run “sort of” personal expenses through their corporation on the theory that they have no other owners to harm.
Sometimes, about January, I get an urgent call from a founder telling me that his or her corporation has received a franchise tax bill from the State of Delaware for tens of thousands of dollars.
The vast majority of technology startups are capitalized in the same manner: common stock to the founders, common stock reserved in an option pool for employees and consultants, and preferred stock (Series A, Series B, etc.) sold to investors. However, a small but probably growing percentage of startups consider a more complicated stock structure that includes, in addition to the types of equity above, a special class of common stock reserved for founders.
We find ourselves explaining 83(b) elections several times a week, so we thought it would be a good blog topic.
In the start-up world, the opportunity to file of an 83(b) election generally arises in the context of a founder purchasing low-priced “founder” common stock of a start-up company that is subject to vesting, or an employee, director or other service provider of such a company “early exercising” an option for stock that is subject to vesting. Such stock is sometimes also referred to as “unvested” stock or stock subject to “reverse vesting.” All this means is that…
