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Imagine this... There's a company out there that has raised a half million to create a first version of their product. They *almost* did that, but ran out of money before they could finish. They've had hundreds of beta users with some good feedback. Everything about the business idea, the code developed already, the other founder and the initial investor seems legit. Now, they need someone to help finish. So they call up good old Gounads and asks me to work for equity-only. They claim the business is currently worth $4m and are currently having an independent agency do a valuation. (I'll try to talk them down) (To further complicate it all, this product isn't the only part of the business but the equity would be for the entire business) I'd like to get in and do this deal, but then I go read about how the IRS taxes these things. For established companies, they count that equity given for work as income. WHAT? Doing some quick math.. if they give me, say, 10%... that's $400k worth of value that I'll have to pay income tax on (assuming I file my 83b up front) and I don't have ~$100k to spend on taxes. If I don't file that 83b, I still have to pay that tax over the vesting period, and it might be more assuming the company value goes up. Besides a straight-up equity deal, are there other ways to structure this where I don't get screwed by Uncle Sam?
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Jan 19, 2016 14:44
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| # ¿ May 6, 2024 22:30 |
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I could be wrong.. but usually one of three things happens on things like this. 1. The company is essentially worth $0 when founders get on board, so there are no taxes. 2. The company is established and pays a cash salary with a small amount of compensation coming from equity. 3. Options instead of straight up equity (I found out more about this route since writing, there are upsides and downsides) Having a decent valuation but no money/revenue is rare. Makes me think more and more that the valuation is BS. Where the money went is something I'll be finding out about. I know they do have a chunk left over, but there would be launch expenses that it'll need to go to. I know they went with a contracting firm to develop the first version and it took ~ a year to do. It's very plausible to go through that money, especially without strong tech leadership to steer you to the cheaper options. The more I think, my guess is... we're going to disagree on values and never come to terms.
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Jan 20, 2016 15:35
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From last page... in case anyone wants to know how it turned out. Talked with lawyer/accountant and was right in my thinking about taxes. But there's this thing called a profits-only interest which essentially states you're entitled to a percentage of profits and appreciation in value. Since it's worth $0 on day one (no appreciation) it's not taxed. We went with that but at a higher percentage. I would have preferred transitioning to a c-corp and doing options, but there were other reasons not to right now.
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Feb 2, 2016 19:53
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Spin it off when you start looking for investors or another person joins in. Probably a good idea as soon as you have customers as well to limit liability. You don't *have* to go the Delaware c-corp route, but investors like it for a variety of reasons. An LLC is an easier route.
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Feb 3, 2016 19:01
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huhu posted:I'm trying to move my product from Kickstarter to store shelves. I contacted the big three companies I thought who might be interested. X got back to me and a guy John Smith was interested and had some questions about manufacturing and I answered them. He said it might be a good fit and that the person, Sally Jones, handles this stuff and she'd get back to me next week to follow up. Two weeks went by, I followed up with John but didn't hear anything back and it's been a week. Should I follow up again? Yes, Weekly follow ups are more than reasonable. Ask for Sally's direct number.
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Feb 6, 2017 17:16
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The Gay Bean posted:My question is about strategies to mitigate this tax burden. Is there any good place where I can read about what my options are here? Are there any particular options I should be pushing for personally to minimize whatever tax burden results? Should I be hiring a lawyer or account here? Go see a tax accountant that understands this stuff. There are big implications depending on subtle differences in how that 1% stake was given. e: Nail Rat posted:I thought you don't need to pay tax on capital gains until you realize them, i.e. selling your stake? Absolutely don't assume that. Cap gains on $150k is like $35k, you don't want that surprise.
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Mar 23, 2017 20:05
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EAT FASTER!!!!!! posted:2) Should I offer them MORE equity? Because I came up with the idea as an employee, I had to disclose the idea right away, but since there's nothing patented it doesn't qualify as "true IP" that they can seize 50% of (they're entitled to like, 1% equity of the startup only). There's a red-flag if I ever saw one. Any code written is copyrightable and is intellectual property, I have no idea what "true IP" is. You need to triple check your employment contract now. Be especially wary about anything along the lines of "any inventions made while employed..." Building a startup that is directly related and used by your employer. Maybe you'd even be paid by the employer to work on it... um... Go talk to a lawyer before going any further.
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May 3, 2017 16:32
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| # ¿ May 6, 2024 22:30 |
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EAT FASTER!!!!!! posted:Our startup employs a process that doesn't seem to be copywriteable or patentable, so it doesn't actually constitute an "invention." Despite this, I'm in the process of contacting an attorney, and thank you for your insight. If you're in the US, almost everything you create is copyrightable, and you own a copyright by default without doing anything at all. Write a document explaining the idea? Copyrighted. Some code to implement it? Copyrighted. Doodle a logo for the company? (you probably do have to take some steps if you want to actually enforce those copyrights, but they do legally exist) I did a very similar thing ~8 years ago. I started a company that made a product while working for an employer. I made very sure my employment contract didn't give them any ownership first. I went out and got a few other users before checking with my employer to see if they wanted to use it. This helped to establish the fact that I wasn't making the product solely for my employer. When they did want to use it, we made up a little 1-page contract/service agreement that stated: 1. Ownership in the product was to my own LLC that I created 2. The employer had a royalty-free right to use the product for some limited term (maybe 2 years?) 3. I wouldn't spend any time working on the product during work hours 4. That it was a mutually beneficial agreement - I'd get feedback and the employer would get valuable services for free. 5.The normal terms of service of the product still applied
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May 4, 2017 15:56
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