Stripe Atlas wrote a short, comprehensible guide for what founders need to know about their equity. https://stripe.com/atlas/guides/equity … Some thoughts:
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The most founder-friendly way to purchase equity is to purchase it before the company has done anything meaningful, right after inception.
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This lets a founder purchase the equity for par value, which (since it was a freely choosable number at incorporation) is likely very low.
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If a founder neglects to purchase equity immediately and creates substantial value in the company, buying at par is not an option anymore.
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This is a problem which can be fixed but the fixes will require you to talk to an attorney and hear some very discomforting things.
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You thought I was joking about that line? I have it in my clipboard, because the landmines are scattered with equity issues.
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Silicon Valley VCs have seen a lot over the years, and they (and YC, and many other folks) will strongly recommend vesting co-founders.
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Vesting means that one's company holds the right to repurchase founder equity if a founder leaves, with this right decaying over time.
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One could model this similar to earning the equity over time like one earns salary over time, modulo some subtleties.
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The vesting terms you are likely to hear most frequently are "4 year vesting, 1 year cliff." 25% vests at 1 year mark, rest over 3 years.
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Co-founders leave after 6 weeks, frequently enough that it is a cliche. Vesting prevents them from walking away with 1/3rd of the company.
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More than one founder has announced an acquisition and then received an email (or call from a lawyer) starting "Remember me?"
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If that co-founder did not have vesting written into their terms N years ago, and did not rigorously execute the repurchase, lawyer time.
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This is a problem which can be fixed but the fixes will require you to talk to an attorney and hear some very discomforting things.
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I always say "Social Network" at this point because it's going to be literally salient enough to be a subplot in the future movie about you.
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Did you know that you can bankrupt yourself by starting a successful company? It's fun and easy. All you have to do is forget 83(b) election
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The IRS treats founders with vesting as having earned their equity over the lifetime of their vesting period, rather than all upfront.
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Since it is earned for services rendered, one is obligated to pay tax, just like if the company compensates you with e.g. a chicken.
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The IRS is uninterested in receiving shares or chicken; it says "Value the property at fair market value, then pay us N% in US dollars."
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A founder can quite plausibly be earning (for tax purposes) ~$350k per month in illiquid shares by the end of their vesting period.
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If that founder did not remember to file a 83(b) election within 30 days of starting, the IRS will ask them for roughly half of $350k. Cash.
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Don't join your accountant's book of Cautionary Legal Tales We Tell To Scare Young Founders Into Filing Elections In A Timely Fashion.
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The situation for earning equity internationally gets complicated in a hurry, and you'll likely need advisors in every country implicated.
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I got some very bad news when selling my 2 software companies in Japan, due to doing the most straightforward thing w/r/t structure + sale.
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And while I don't begrudge the Japanese tax authorities their ~60% marginal rates on those transactions, I'd encourage you to get advice.
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On another note: software startups in particular are generally sticklers for making very, very sure that the company owns its IP.
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The body of practice has evolved towards gating equity ownership on successful execution of IP assignments to the company.
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Why? Because otherwise the people who create the IP (founders, engineers, writers, etc) default to owning it. Fast forward to a later date.
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When the company is sold, someone tells acquirer "Oh you can sure by that corporate entity but my intellectual property will cost you extra"
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This can cause acquirers, who have seen this movie before, to nope nope nope out of the deal.
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This is a problem which can be fixed but the fixes will require you to talk to an attorney and hear some very discomforting things.
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