Fundraising · Accounting

Convertible notes and the IRS

Dhruvkaran Mehta CEO at Outbound

June 10th, 2012

If a startup raises a seed round with convertible notes:

- Does that count as a priced round for IRS purposes?
- Does that answer changed based on whether or not the note is capped?

The reason I ask is that there is some merit in being able to incorporate
right around when you raise money for the first time.

I\'ll appreciate any help I can get from the community here.

Best,
Dhruv

Jason Crawford Co-Founder & CEO at Fieldbook

June 10th, 2012

I don\'t know anything about taxes�you should ask a lawyer�but you should
definitely incorporate before (or basically at the same time as) you raise
money.

Getting incorporation right is important. Don\'t screw around with this. Get
a good lawyer, one who knows startups, and get them to do it right. Getting
things wrong at this stage can be irreversible later, or very
expensive/painful to reverse. Not worth it to skimp on this part. (Example:
if you neglect your 83(b) election, you can face a huge tax burden later.
Don\'t know what that is? Ask your lawyer. Lawyer can\'t tell you? Get a
better lawyer.)

I\'m putting this bluntly to make it clear. Most things in startups you want
to be resourceful and get away with the minimum possible until you
absolutely need it. Not this.

Hope that helps,
Jason

--
Blog: http://jasoncrawford.org | Twitter: @jasoncrawford

On Sun, Jun 10, 2012 at 9:50 AM, Dhruvkaran Mehta <dhruvka...@gmail.com>wrote: