The passing of the JOBS Act created much fanfare, especially given the relaxation of the securities laws with respect to the use of “general solicitations.” Notwithstanding the excitement from the blogosphere, the revised rules also come with some hidden costs that make using a “general solicitation” in fundraising less attractive.
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”).
Potential investors usually request an “Executive Summary” prior to meeting with new startups. The Executive Summary is a one- to two-page document that covers the aspects of the startup that investors care about most, including the concept, the market need and opportunity, and the startup team.
“Vesting” is a term of art that is often glossed over by new entrepreneurs as they grapple with other newer and scarier terms to which they are being introduced as they start their companies, like “pre-money valuation,” “fully-diluted capitalization” and “broad-based weighted average antidilution adjustments.” However, I think it is good for entrepreneurs to have a thorough understanding of what vesting means.
How does a technology startup determine its valuation? Is it an art, a science or a combination of the two? Does a startup’s valuation increase if it has a slick pitch deck and a clever company name? Should a startup use a Ouija board to determine its valuation?
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…