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Can my company issue more shares to a founder who already owns stock?

EquityCo-foundersTax

Yes. A corporation can issue more shares to a founder who already holds stock, with a board consent approving the issuance and a new stock purchase agreement, and the founder pays for them. The catch is the price. At formation the founders paid par value because the company was worth nothing. Once it has a product, revenue or a term sheet, the shares are worth more than par, and a founder who buys them at par has received the difference as compensation. That difference is ordinary income to the founder, and the company has a withholding obligation on it.

Fair market value now

Under Delaware law the board's judgment on the value of what the company receives is conclusive unless there was fraud, which protects the issuance as a corporate act and does nothing for the tax, which turns on what the shares were actually worth that day. A company that has raised money or granted options usually has a 409A valuation, an independent appraisal of the common stock, and that number is the price a founder should pay. Before any valuation exists, the board should write down its reasoning and the facts it relied on.

Issuing dilutes everyone else

New shares to one founder reduce every other holder's percentage. Rebalancing two founders by issuing to one of them makes the whole company pay for a private adjustment. If the point is that one founder should have more and another less, the cleaner route is a transfer of shares between them, or a repurchase of some of the second founder's unvested shares by the company. A transfer below fair value has its own tax character, as a gift or as compensation, but it touches nobody else's stake.

The paperwork

A board consent that states the number, the price, the payment and the reason the price is fair. A stock purchase agreement, with vesting if the shares are meant to be earned. An 83(b) election within 30 days for any unvested shares. An updated ledger. The stock purchase agreement is in Arabella's library; the issuance consent is not a template today, so ask Arabella what it needs to say.

Written by the lawyers who built Arabella. This is legal information, not legal advice for your situation, and reading it does not make us your lawyers. For a real dispute or a high-stakes decision, talk to a licensed attorney. More questions.