Most Read Contributor in United States, September 2016
Founding a company is an exciting moment in an
entrepreneur's career. But even on Day 1, there are steps
entrepreneurs should take to avoid major financial and diligence
issues in the future. In this series of posts, we'll
cover some basics that often trip up founders to help guide you
through those early steps.
Entrepreneurs often assume they own their company de facto
(i.e., by virtue of the fact that they formed it, without any other
required action)- a proposition that seems so logical and
fundamental, it's hard to believe its not true.
Later in their company's lifecycle (typically, when
there's pressure on due diligence because the founders either
consult an attorney knowledgeable in the space or there's
an interested incubator, accelerator or angel investor), many
founders are surprised to learn that after forming their company,
they must take another critical step to become shareholders in the
company they founded – purchasing their
This often overlooked step works to the founder's benefit,
when it's done correctly. In fact, we often tell founders
that the ability to purchase their company's stock one Day 1 is
one of the core economic upsides to founding a business in the
first place. While this seems backwards (why should you have
to buy stock in a company founded by you- isn't that the
investor's role?), it makes sense considering the price the
founders pay for that stock, as long as the stock is purchased at
or near the time of formation of the company. Because at
formation of the company, there's typically no assets or
value associated with the company other than the nominal par
value of the stock, allowing a founder to purchase their
shares at a fraction of a penny per share (whatever the par
value is set to).
Of course, there's nuances and unique circumstances to each
company formation that need to be discussed with your lawyer and
financial advisor. Sometimes, there is real value associated
with the stock, even on Day 1 (for example, if the company is a
spinout with assets). And there are other steps that a
prudent founder or founding team may need to take at inception
along with the purchase of their stock (e.g., consider imposing
vesting restrictions on the stock and filing an 83(b)
But first things first, make sure you purchase your stock on Day
1, before that hockey stick growth you're projecting becomes a
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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