Do Founders Have to Pay for Shares?
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A common question we get asked is do founders need to pay for their stock in a company that they founded? And the answer is pretty simple – it’s yes.
Founders must pay for their own stock under corporate statutes like the Delaware General Corporation Law, Section 152. When a corporation issues stock to a founder, the stock must be what’s called “fully paid and non-assessable”. When a founder goes to raise money, he or she will have to represent and warrant to investors that all the stock issued by the corporation to the founders is fully paid and non- assessable. Under Delaware General Corporation Law, a founder does have to pay the corporation for his or her own stock. The failure to pay fair market value for stock, even to the company founder, may result in a taxable impact. Companies should look at safe harbors, such as those under Section 409A for strategies to avoid taxable income.
The next question we get is, do founders have to pay cash for their stock? The answer is no.
Under the Delaware General Corporate Law, as well as other types of corporate statutes, a founder does not have to pay cash for their shares. They can contribute cash, property – either tangible or intangible like IP or intellectual property, – or any other benefit to the corporation including services. However, just like the issuance of stock to investors, the company does have to do a board consent outlining the consideration that is going to be received for that stock and a stock purchase agreement or another type of document evidencing the actual issues of the stock. The corporation should also issue stock certificates to the founder.
Where founders go wrong –
Sometimes, a founder will form a corporation and assume that he/she has been issued stock. However, he or she has not papered the documents to reflect the stock has been issued. This presents a challenge when the company goes to raise money. As part of the financing process, investors will discover deficiencies in the company’s corporate stock issuance documents. Founders should make every effort to remedy those issues before they become a problem by documenting the issuance of their stock properly.
Disclaimer: This post discusses general legal issues, but it does not constitute legal advice in any respect. This post is not a substitute for legal