Founder’s stock refers to the initial shares allocated to a startup’s founders when the company is formed. These shares represent the founders’ ownership and are typically issued at a nominal value to reflect their contributions, such as capital, intellectual property, or time. Founder’s stock often comes with specific rights, restrictions, and vesting schedules to ensure long-term commitment to the company.
How does founder’s stock differ from regular stock?
Founder’s stock is typically issued at a low cost when the company is established, whereas regular stock may be issued later at market value during funding rounds. Founder’s stock often includes vesting schedules and restrictions to ensure commitment, while regular stock purchased by investors may not have these conditions.
What is a vesting schedule, and why is it important for founder’s stock?
A vesting schedule outlines the timeline over which founders earn their full ownership rights to their shares. For example, a typical vesting schedule might involve a four-year period with a one-year cliff, meaning a founder must stay with the company for at least one year to start earning equity. Vesting ensures that founders remain committed to the startup and protects the company if a founder leaves early.
Can founder’s stock be diluted?
Yes, founder’s stock can be diluted when the company issues new shares to raise capital or offer employee stock options. While dilution reduces the founders’ percentage ownership, it often increases the company’s valuation, potentially maintaining or growing the value of their holdings.
Are there tax implications for receiving founder’s stock?
Yes, receiving founder’s stock can have tax implications, especially if the shares are subject to vesting. Founders may choose to file an 83(b) election, which allows them to pay taxes on the nominal value of the stock at the time of issuance rather than its potentially higher value when it vests. Consulting a tax professional is highly recommended.
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