Answers|Dictionary

Is founder stock a different kind of stock?

EquityCo-foundersTax

There is no class of stock called founder stock. A startup corporation has common stock, which founders and employees hold, and, once it raises a priced round, preferred stock, which investors hold. What people mean by founder stock is common stock bought at formation for its par value, typically $0.0001 a share, so that a founder's five million shares cost $500. The stock itself is the same common stock an employee's option will buy years later. The price is what cannot be repeated.

Why a later hire cannot have it

The tax rule is that a person who receives stock for services is taxed on the difference between what the stock is worth and what they paid. On formation day the stock is worth its par value, so a founder paying par has no income. Six months later, with a product and a round in progress, the common stock might be worth five cents a share. An employee given 250,000 shares at par then has $12,500 of taxable income, and the company has a withholding obligation on it, in a month when neither has the cash. The way around that is to grant options with an exercise price equal to the current value instead, which is why employees get options and founders get stock.

What people also mean by it

Sometimes founder stock is shorthand for founder terms: vesting that started before formation, no cliff, acceleration on a sale, a right of first refusal in the founders' favor. Those are terms in the founders' stock purchase agreements, and a company can give some of them to an early hire's restricted stock if the board chooses. They do not make the shares a different class. A few companies do create a hybrid class for founders, sometimes called Series FF, that converts into preferred if the founder sells in a financing; it is unusual and it is an investor conversation.

What to tell the person asking

That they will receive common stock, or an option to buy it, on the same class the founders hold; that the price will be the current fair market value set by the company's 409A appraisal, because a lower one would be taxed as income; and that the grant will vest. It is the same equity. The difference between founding a company and joining one is the day you bought in.

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.