Thank you to Muhammad Baig for creating these notes. To contribute to the TWiST PodNotes archive email us.
Episode Date: March 26, 2021
https://youtu.be/Vd7SfZn1Q4o
- Anytime you buy stock subject to vesting, there is this 83(b) election that you can make under the internal revenue code. If you don't make one, the IRS will tax you on each date that you vest shares and compare the fair market value on that date to what you bought at. They will tax you on the delta.
- You have to file it within 30 days of purchasing your stock. No exceptions to this. With the filing, you're telling the IRS that you understand you may not vest all of these shares, but you want them to tax you today as if you were vested for all of them. And you want to pay the tax due on all of it, today. On day 1, the delta is 0 and so you pay no tax.
- In your restricted stock purchase agreement, there will be an exhibit to the stock purchase agreement. In there, your lawyer should provide the 83(b) election already filled out for you. You are responsible for mailing it in.
- You can't just incorporate the company and leave it at that. There are steps that must take place. You don't just automatically own everything.
- You have to appoint directors for your board and then the board determines who the officers of the company are — who have authority to sign on behalf of the company.
- Just because you're a CFO, doesn't automatically make you an officer. You need the board to appoint an officer for any given title. Also, you need to have that board of directors actually issue and approve stock. After that, you have to buy that stock from the company (i.e. write a check).
- In your vendor agreements, the apparent authority is what matters. You don't have to be an appointed officer. Vendors and companies can rely on apparent authority in legal disputes.
- Getting incorporated after getting a term sheet would mean that the valuation of the company would take into account the numbers on your term sheet. Even though you don't have to issue your stock at that valuation, because that's preferred stock pricing, you absolutely do have to go and get a 409A valuation report to find out what the value of the common stock is. Assuming this financing goes through, the value per common stock will be much higher than a fraction of a cent per share. That means you pay for that amount.
- All the contracts where you hired a developer or contractor, were personal contracts between you and that contractor. You now need to get that contract under the company. Maybe the third party is amenable to signing a quick, easy assignment. You still have to go through the process of getting that assignment. They could say no and ask you to pay them more for it.
- Some are better than others. You have to be proactive and on the ball. You have to be detail-oriented to get it all right.
- They will send you all the documents, but if you don't sign anything or write that check to purchase the stock, that means you didn't actually execute.
- Secondary shares used to occur 1 in every 20 series B deals. Today that number is around 1 in 3. It's become a standard for founders with a very competitive deal. We have moved in this direction because we are in a founder-friendly market now.
- Investors use secondary shares as a way to win deals. Nothing wrong with founders going with a deal that includes a secondary, as long as it is also a good deal for the company.