In a prior Founder Tip of the Week we discussed how the Internal Revenue Code (the “Tax Code”) characterizes unvested founder stock as not being purchased until it has vested, and that this characterization can have adverse tax consequences for the founder because the Tax Code treats as taxable income the excess, if any, of the fair market value of stock at the time it vests over the purchase price of the stock (the “spread”).
A new Delaware law, signed on July 17 by Gov. Jack Markell, allows companies to be formed as public benefit corporations (PBCs), which balance stockholders’ returns, the impact on other people affected by a company’s business activities, and the creation of an overall public benefit. Starting on August 1, Delaware companies will be able to form or reincorporate as PBCs, or merge with PBCs.
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.
