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Ask HN: Best way to equalize founder stakes 2.5 years in?

8 points by liquizar ↗ HN
Hey HN - a friend and I started a company 2.5 years ago. We started 60/40 originally, but have since worked our way to a 50/50 (we agreed a while ago this was a better arrangement for motivation etc, and has worked well) and need our share structure to reflect that. Wanted to see if anyone has been in this situation before and how to minimize tax burden

Some relevant details:

- C corp with 10m shares outstanding, 5m common stock issued - 3m to 1 founder, 2m to the other.

- no outsiders are involved in terms of investors, board, etc. no money raises, bootstrap from ground up

- $2.5k rev 2014 -> $370k revenue FY 2016

Gift? private stock sale? Issue shares?

Thanks

14 comments

[ 2.4 ms ] story [ 40.0 ms ] thread
siegel
If you agreed to this 50/50 split a while ago, then you could deem that an oral contract as of that date. If your revenue was less at that point, then you could justify a very low stock price (and, thus, a minimal or no tax burden). All you would do now is document that oral agreement in writing, dated as of the date of the oral agreement.
liquizar
Even better - I have the intent to equalize in early 2016 board meeting notes...good idea
siegel
Perfect! Good thinking (intentional or not).
owens99
Entrepreneur here not a lawyer, but as a startup you want to keep costs low. Legal fees can be $10k+ just to issue new shares.

Unless you are profitable, I'd try delay doing this until a funding event and do what the the other commenter Siegel mentioned. Just get the commitment in writing or in a contract and don't go through the messy process of issuing new shares unless your business has product/market fit and is stable. Because before product/market fit you should worry only about getting to product/market fit. You shouldn't worry about sharing % of nothing. NOTE: revenue =/= product/market fit.

But make sure you do it before, or at the same time you raise money.

If you can afford it, ask a lawyer if you can issue more shares to keep the %'s the same 50% shares outstanding and 50% common. Then adjust the amount owned by you and your co-founder. ie. issue another 10m shares, 2m go to your co-founder and 3m to you, then you have 20m outstanding, 10m common with 5m/5m. Get a price quote upfront for the work.

Again, I'm not a lawyer so this is NOT legal advice. I don't know if this is the most economical or easiest way to do it, but it's one way you might do it.

siegel
If anyone is charging you $10k+ to issue new shares, that's crazy!
owens99
most early early startups don't keep up with legal, so when it comes time to issue I know a lot of startups who had significant clean up to do
saluki
You will probably get some good advice here but just wanted to recommend getting a lawyer and accountant involved to make sure you minimize any tax liabilities and do it the right way for your state/country.

Congrats on a successful company.

liquizar
Yes absolutely...currently have both just poking around for 2nd opinion :)
perfmode
Are there any tech solutions for cap table management?

As an alternative to bespoke legal counsel.

Lordarminius
Issue new shares to reflect the agreed shareholding structure and do it with the aid of a lawyer.

Right now, based on the information you provide, you do not have a 50/50 split. It still stands at 60/40 and if there is ever any dispute over it, its your word against his.

Handshake deals and verbal agreements are alright but your best friend in business is a solid, written, legal contract

(disclaimer: IANAL)

[dead] Lordarminius
Issue new shares to reflect the agreed shareholding structure and do it with the aid of a lawyer.

Right now, based on the information you provide, you do not have a 50/50 split. It still stands at 60/40 and if there is ever any dispute over it, its your word against his.

Handshake deals and verbal agreements are alright but your best friend in business is a solid, written, legal contract

(disclaimer: IANAL)

addcn
So everyone here is right, you can issue new shared no problem at all, BUT no one has mentioned tax implications.

If you gift someone shares they have to count them as income. On day 1 when you valuation is arguably $0 this is NBA. 50% of $0 = $0 but today 10% of your business at a conservative 5x multiple is closer to $200k. Might be more, might be less, but that's income and your partner needs to pay taxes on it.

This could be the worst/best gift they receive. Typically what you're describing is done with stock options. That is, granting him the right to buy shares at a future date at a fixed (low price). No matter what people tell you options != equity. You can approximate what the right number to give him are but it'll never be the same as having 50/50. If you want to give him 50% you should issues shares, but make sure you give him a big cash payout (hint: also taxed!) so he doesn't end up underwater.

liquizar
is 5x multiple on revenue conservative? That seems to be the golden question here...the valuation and how to justify one. Multiple on EBITDA?
avifreedman
If it's just the 2 of you, it might be easier for the company to buy back his shares at the issue price. Need to check with your lawyer, of course, re: valuation issues, but if it's just the 2 of you it may not matter, and future investors will be understanding of what was going on.