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How do founders pay for their shares?

EquityFormationTax

Founders pay the par value of their shares, and they pay it in one of three ways: cash, an assignment of the intellectual property they created before the company existed, or a combination of the two. Delaware's statute lets a board accept cash, any tangible or intangible property, or any benefit to the corporation as payment for stock, so long as the value is not less than par. At a par value of $0.0001 a founder's 4,000,000 shares cost $400. The amount is small. Whether it was actually paid is what an investor's lawyer checks.

Cash

A personal check or transfer to the company's bank account, dated at or around the issuance. If the account does not exist yet, pay the moment it opens and keep the record. A company that never received the money has shares that were, strictly, never paid for.

Intellectual property

A technology assignment agreement transfers the pre-formation code, designs, name and domain from the founder to the company in exchange for the shares. It does two jobs at once. It is the consideration for the stock, and it moves the assets the company is built on out of a founder's personal ownership, which is the first thing an investor's counsel will check.

Both

Most formation packets use the assignment plus a small cash payment, so that the shares are paid for even if someone later argues the assigned property was worth nothing. The restricted stock agreement states the purchase price and the form of payment, and the board consent approving the issuance records that the board accepted that consideration. The 83(b) election reports the amount paid, so the figure on the tax form should match the agreement.

Shares issued for nothing can be challenged as not validly issued, which is a problem that surfaces years later in a financing or a sale. Fixing it at the start is a receipt. Fixing it later is a ratification the investors' lawyers will draft.

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.