Ask HN: Giving new co-founder 40% equity at seed round?

[throwaw87]

I have a C-Corp and want to bring in a new 30-40% co-founder at a possible upcoming $5M valuation seed round.

The problem is, every scenario I look at ends up with him paying unaffordable taxes, even if he vests 10%/year -- he is just out of college. We have minimal cash and may not be able to restructure the shares before the seed round if it's expensive to do so. (The seed round isn't guaranteed but looks promising.)

I own 90% currently (RSUs reverse vesting), we have a 10% early investor (preferred stock), and our current legal fees are deferred until the seed round (would it be typical for them to do this restructure, even if the seed round isn't guaranteed?). Even then, our current valuation is about $1M based on the early investor, which would still impart some taxes (especially with reverse vesting).

With RSUs and options, I believe he'd have to pay for the stocks at the new $5M valuation. We could maybe buy back some of his shares to help pay the taxes, but I doubt investors would consider that good use of their money? Either way, I don't want to lead our new co-founder on if there's no way to structure this.

Would any of you have any idea how I might be able to make this work? Would be super appreciated. (He's been integral from the very beginning, which is why I wanted to give about equal equity instead of a seed-round-funded market salary.)

[slap_shot]

You should be asking a lawyer, not HN.

If you haven't had a priced equity round, you should be able to sell restricted stock at par value (usually a fraction of a penny). Especially if your _upcoming_ round is a mere 5 million, the business today is probably basically worthless.

[throwaw87]

Thanks, good advice! Wanted to see if there were any options in advance, since it's hard to research online.

[Twaway45609]

Could you not dissolve the business and create a new one together, bringing thrn in all its ip etc..

[throwaw87]

Thanks for the reply. Yes reluctantly, as long as we can satisfy the deferred lawyers. Hopefully it wouldn't make for a complex story when we're trying to raise a seed round - could look like we don't know what we're doing.

Was hoping a way might exist without having to dissolve since we're also short on cash.

[relaunched]

Talk to an attorney, like your deferred ones. The price investors paid isn't the same as the common stock value of the company. Given there are implications for the co-founder, the company and the investor, make sure it gets done correctly, with no surprises.

[danieltillett]

Have you asked him? Maybe he will be happier with a smaller share and avoiding the tax implications.

[throwaw87]

We planned on being co-founders all along, but he came in slightly later after the legal was initially done -- then it took a while longer than I hoped to raise the seed due to COVID. He wouldn't appreciate me reneging on that, especially since he's been equally integral to the business as myself.

[danieltillett]

I wasn’t suggesting reneging on the deal, just laying out the options and letting him choose.

You could consider winding up the company and starting again with a fresh company.

[throwaw87]

Thanks and agreed -- it is always best just to be honest and upfront about what options exist.