Common First-Time Founder Mistakes with Becki DeGraw | Wilson Sonsini Startup Legal Basics

TL;DR

This video discusses common mistakes that first-time founders often make when starting a company, including missed 83b elections, failure to purchase company stock, and starting as an LLC instead of a corporation.

Transcript

hey everybody welcome back to our startup basics series here at this week in startups what is startup basics very simple i get asked the same questions over and over and over again will you invest in my company uh show me your traction will you invest in my company show me your attraction it's the same conversation over and over again whether it's ... Read More

Key Insights

• 🚕 Making an 83b election is critical for founders to avoid significant tax consequences related to stock vesting.
• ❓ Founders should ensure they purchase company stock to establish ownership and alignment of interests.
• 😥 Appointing directors and officers is necessary to exercise authority and make decisions on behalf of the company.
• 🥺 Delaying company setup until after funding can lead to tax and valuation problems.
• 🤑 Using online incorporation services may save money initially, but it is crucial to ensure all necessary steps, such as stock issuance, are completed accurately.
• 🥺 Founder-friendly market conditions have led to increased instances of founder re-ups and secondary share transactions.
• 🔠 Starting as an LLC can result in challenges when seeking venture capital funding, and converting to a corporation is a complex process.
• 🚕 Involving an accountant familiar with the tax implications of converting from an LLC to a corporation is crucial for founders.

Questions & Answers

Q: What is an 83b election and why is it important for founders to make one?

An 83b election is an IRS filing that allows founders to be taxed on their stock purchase at the fair market value, avoiding potential taxes on subsequent vesting. It is crucial for founders to make this election within 30 days of stock purchase to avoid unnecessary taxation.

Q: Who is responsible for filing the 83b election?

The responsibility for filing the 83b election lies with the founders. While an attorney may assist in preparing the necessary documents, it is ultimately the founders' responsibility to file the election within the specified timeframe.

Q: Why is it essential for founders to purchase company stock?

Purchasing company stock demonstrates genuine ownership and aligns interests between founders and investors. It also helps avoid potential tax and valuation issues when seeking funding or exiting the company.

Q: What problems can arise from starting as an LLC instead of a corporation?

Starting as an LLC can lead to complications when seeking institutional funding from venture capitalists. Converting from an LLC to a corporation involves additional costs, tax considerations, and potential issues with stock options and equity grants.

Summary & Key Takeaways

• The video addresses common mistakes made by first-time founders, including the failure to make an 83b election, which can result in significant tax consequences.

• It highlights the importance of founders purchasing company stock and appointing directors and officers to ensure proper ownership and decision-making authority.

• The video also explains the potential problems of delaying company setup until after funding, such as tax and valuation issues.