409A · Cofounder

Cofounder Equity Being Issued After First 409A Valuation

Shane deLumeau CEO

Last updated on August 28th, 2017

I've been working as part of a start-up for the past 8 months and have been issued a cofounder equity opportunity with a few other people. We've been waiting to get the official stock agreements as we've worked on closing business. With some angel investment coming, the original founder decided to get 409A valuation done bringing the company's valuation up a few hundred thousand dollars. Now stock agreements are being worked on and me and the new cofounders are being asked to take a tax hit on our personal taxes because of the new valuation.

Shouldn't we have been issued our stock agreements prior to the first 409A valuation when the FMV was $0.00005 per share? We were issued advisor shares when initially jumping onboard at the FMV and paid essentially nothing. Now since we are coming on as cofounders, was this done backwards? Are there any fixes for this so the new cofounders aren't forced to take a tax hit?

Clarence Wooten

August 28th, 2017

Considering that you have been working for 8 months, the answer is yes. The founder(s) of the company should start your vesting from the moment you started working. At the time you started working, the 409 valuation would have been closer to par value (assuming you joined the company around the time it was formed) pre any significant capital infusion. I'm guessing that you have standard 4-year vesting with a 1-year cliff. If the founder initiates your vesting from the day you joined the company, you will only have 4 months remaining to reach your vesting cliff and vest in 25% of your equity. I believe hitting your vesting cliff within the next 4 months is even more important than getting a lower strike price on your options. Although, in your case, they go hand-in-hand. Good luck,

Tony Rajakumar Founder/CEO at SnugBoo

August 28th, 2017

Tricky area, and filled with traps laid by the IRS for the unwary. Best way would be for the company to compensate you with some extra stock with a new grant, or perhaps an accelerated vesting schedule.