Ask HN: Setting fair market valuation for founder's equity

[scattrplot]

Howdy,

We're incorporating a startup and need to set a fair market valuation for the company. This valuation will decide how much the founders pay for their shares.

Has anyone heard of founders being audited by the IRS and being questioned on the FMV? We think a $10,000 valuation is fair right now, but we hope to raise a series A later this year based on a multi-million dollar pre valuation. We plan to file our 83b within 30 days and be as thorough as we can with our paperwork.

Any other advice on setting the FMV with regards to personal tax liabilities?

Thanks!

[gyardley]

Talk to your lawyer and your accountant.

If you plan to raise venture capital, and you don't have a lawyer or an accountant to answer these important questions, you're not spending money on the right things.

That said, the value of our founders' stock (in a new company, before any IP had been donated to the company and prior to the raise) was a few hundred bucks.

Ten thousand sounds high - remember, with an 83b election you pay tax when you receive the stock (do not forget to do this), so assuming a 50-50 split that's taxes you've got to pay on an additional $5,000 in 'income' you didn't actually get, at a time when your real income's likely lower than usual.

[scattrplot]

We have an attorney and are looking for an accountant. But I wanted to check on HN as well.

We built a site and get a couple thousand visitors a day. But it's not self-sustaining - if we dropped work on it, the traffic would probably drop off. So I figured $10k was fair (?)

We plan to buy our founders shares, so I think (with the 83b election) our net income is zero — we paid $X for $x worth of shares.

[staunch]

IANAL.

Fair market value is pure hand-waiving in the beginning. Make it $400 or something. You could easily argue that the value is $400 because your position isn't at all secure (the company could easily fail).

Also, don't forget that you can contribute IP as payment for your stock. No reason to pay cash.

Your understanding of the 83b election is correct. You pay no tax until you realize a profit on your stock. The 83b lets you elect to be taxed immediately (at the same price you paid for it) which means a net gain of zero, thus no tax liability.

[Thunderberry]

I don't have any stories myself, but always look to Nivi and Naval at Venturehacks / AngelList for this kind of info... Might be worth reaching out to them?

[scattrplot]

thanks for the pointer!

[nickfromseattle]

Regarding the 83b - 30 days from what point exactly? We signed the docs granting shares on a vesting schedule, but we haven't actually had our lawyer issue the shares or recorded it in the ledger. We signed the documents well over 30 days ago.