Legal Question in Business Law in Delaware

We're a newly founded c-corp raising around 150k from 5 friends. Planning to give them common shares. We did not issue our founder's stocks yet. What is the best way to get the money and give the stocks in terms of taxation and for any other future concerns? Making these investors founders too, together with us, and let them loan the money to the company? Or directly invest in the company with a specific valuation like other rounds? We've authorized 10 million shares with 0.00001 par value and will deliver 500,000 shares for $150k. So stock price come to 30 cents. What would be the effect of this price rise in only a week in terms of taxes? For us the founders, and for our friends, investors?

Asked on 6/19/17, 4:08 pm

1 Answer from Attorneys

Roman Fichman Esq. Law Practice of Roman Fichman Esq.

You are about to make a series of mistakes that could cripple you when in the future the time would come to raise funds from angles/venture capitalists. And if they don't cripple you they will end up costing you ten fold (yes 10x!) to fix issues that could be easily addressed now.

For starters once you issue your friend stock your founder stock will get much more expensive because of the friends round and for no apparent reason. Plus you probably did not formulate the board properly so it could be arguable that the authorization to do the round may not be valid.

Second, you ought to separate ownership from control from title. The investors may want to be called founders but is it in the best interests of the company? Is there another title that could satisfy them and at the same time not confuse future investors?

As far as taxes go, generally speaking, at this time the company's sale of stock does not seem it would be a taxable event, but as you probably suspect there are significant tax consideration to be made for the founders and likely the investors.

This is the time to retain a startup attorney. This is not the time to do DIY. The initial cost of retainer is not high and many times I consider delaying getting paid in full until the round is complete so you have very little out of pocket expenses and all the legal support you need.

Contact me directly asap.

Roman R. Fichman, Esq. │ @TheLegalist

email: Info (@) TheLegalists (dot) com

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Answered on 6/19/17, 8:53 pm

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