This post was contributed to VentureApp by Kathy Nolan, Client Services Manager and a Corporate Attorney for Shoobx, Inc., your startup operating system from incorporation to exit. You can use Shoobx for company formation, equity and cap table management, hiring employees, raising capital, board and shareholder management, collaboration with your legal counsel, and more.
People often put off granting founder shares. Either they don’t understand how it affects their business (ownership, control, fair market value, taxes), or they have a whole host of excuses for why they’d rather do it later. The result is the same: the company is many months down the road, and the founders still don’t have stock. You’re going to grant the shares—it could be detrimental if you wait too long to actually do it.
Why you shouldn’t wait so long to grant shares: Your fear of getting it down on paper is unreasonable
You should memorialize the agreement now, instead of later. I’d especially like to address four prevalent rationales that lead founders to procrastinate:
Attitude 1: I don’t want to introduce conflict. Founders don’t want to have the hard conversation about who deserves how many shares. They worry it will turn into a fight, one that they’d rather put off until tomorrow. You’re going to have this conversation sooner or later—and it’s better to have it sooner. If someone’s going to throw a fit and say they deserve 50% of the shares, their attitude won’t improve for avoiding the subject. If anything, once each share is actually worth money, they’ll be even more unreasonable. Don’t put off the fight—just do it.
Attitude 2: Let’s see if the company makes it. Some founders are thinking they’ll try out this new company thing for a bit, see if the product works out, and they are thinking that since the whole company might fold, there’s no point in taking the effort to negotiate and lay out founder shares on paper. This is wrong. You want to allocate shares when the company is worth less and the stakes are low.
Attitude 3: Let’s see if the co-founder is useful. Maybe you’re thinking Bob might wind up moving to California, so let’s see if he sticks around and then grant shares to him. Founder shares are meant to incentivize people to work hard on the product (or stay in Boston with your company and NOT jump ship to California). Granting shares with appropriate vesting provisions helps address this concern.
Attitude 4: I already know who’s getting what, I’m just too busy to draw up the paperwork—I have a company to run, after all! To this point, I’d say you can’t be sure everyone is on the same page until you spell it out. The exercise of putting it all on paper sometimes reveals that everyone wasn’t actually on the same page. Better to know that sooner than later.
Why you shouldn’t wait so long to grant shares: Fair market value (FMV)
From the day you start your company, your fair market value (FMV) is going up if you play your cards right. The more you develop your product or service, the more valuable your company becomes (in theory). If you start your company January 1st, odds are by December 31st you’ve done a lot of great work that will have increased the value of the company (and thereby its underlying equity).
While good for your company, this is bad for your wallet since you will have to pay whatever the founder shares are worth at the time they are granted. In other words, you’ll have to pay more for your shares in December, than if you had purchased them in January.
Why you shouldn’t wait so long to grant shares: Franchise taxes
Another issue that’s rarely mentioned is that your franchise taxes may or may not be crazy if you authorize a bunch of shares, and you don’t grant them. I’m not going to go in depth on this, since this isn’t a tax post, and I’m not giving tax advice, but take a look at the Delaware tax calculator. Play around with the tax calculator and see for yourself what happens when you authorize oodles of shares, but don’t grant oodles of shares in the same tax year.
Why you shouldn’t wait so long to grant shares: Capital gains holding period
You want to get your capital gains holding clock started as early as you can. Why? The sooner you get the clock started, the sooner your stock may qualify for long-term capital gains. Long-term capital gains are generally given preferential tax treatment over ordinary dividends and short-term capital gains.
Grant your founder shares and get your clock started—who knows when you’ll be acquired.
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