The norm for technology startups is for the founders to purchase the initial common stock at a very low price at $0.01 per share or less.
I usually sell the initial common stock at $0.001 per share. Part of the reason why I do this is because I like to issue each founder 1,000,000 shares of common stock at incorporation. By selling the shares at $0.001, this gives me a nice round total purchase price per founder of $1,000 (i.e. 1,000,000 x $0.001). At $0.01, the founders would have to pay into the new corporate bank account $10,000 each. That sure is a lot more painful. Especially considering that some Web 2.0 startups do not need more than a total of $10,000 to start their company.Even less if they already know how to
set up a website and program all the back-end stuff themselves. I am currently representing some amazing Web 2.0 startups that have started with around $5,000 in the bank and are doing great.
When talking purchase price, remember that anytime securities are sold, they must be sold at fair market value or there will be certain tax consequences related to recognition of ordinary income, cheap stock, etc. The reason we can have the company sell the common stock to the founders at $0.001 per share (and reasonably argue that the fair market value is $0.001 per share) is because the company is arguably not worth anything at the time of incorporation. It is at ground zero. However, as soon as the company signs a significant contract, or starts generating income, the fair market value must be more than $0.001.
Latest posts by Sam Wu (see all)
- Don’t Pay That Tax Bill (Until You Recalculate) : How to Calculate Your Startup’s Delaware Franchise Tax - February 24, 2017
- Day #2 : Let’s Make It Official – Hashbrown Incorporates - September 15, 2015
- Day #1 : The Launch of Hashbrown - September 1, 2015