409A · Angel investing

How close to the 409A can I issue cofounder equity?

Shane deLumeau CEO

Last updated on September 7th, 2017

During the course of working on the start-up, our team didn't issue cofounder equity and built the product. Now we have an investor who is looking to purchase common stock and is requesting a 409A valuation. Needless to say, we don't want do a 409A and get hit with the higher fair market value since our start-up should essentially be worth $0.


Since the 409A is being asked for, how close to the 409A completion can the cofounder equity be issued without getting into a tax issue? Are there any examples of other start-ups issuing cofounder equity the week before getting a 409A done and then taking an investment? We've received two answers from two separate attorneys. Any guidance would be appreciated.

Curt Sahakian Attorney

Last updated on September 12th, 2017

Shane,


You find yourself in a predicament that many starts fall into. There are solutions to it, but none are particularly good, and they vary from situation to situation.


Bottom line though, is that you really need to get a 409a valuation immediately prior to issuing your "cofounder" shares. It would be best if the valuation is dated on even date with the issuance of the stock


Otherwise all you are doing is risking a lot for a little.


  • Also if you find yourself backdating any documents you are asking for trouble.
  • If you try to sandbag or game the valuation to get a certain result, again you are asking for trouble. That means you need to inform the appraiser of your expected near term financing and its expected terms.



Eric Kaufman Managing Director, Acumen Business Advisors,llc, Startegic Advisor to startups and small businesses

September 6th, 2017

Shane.

If you have not already done so, now is the time to secure competent legal counsel to guide you.