How do founders get their company stock?

Takeaway: Founders purchase their shares when the company is first formed for a de minimis amount of cash (e.g., $0.00001 per share). Founder stock is typically subject to 4 year vesting with a 1 year cliff and double trigger acceleration.

Startup founder stock grants are a common way for early-stage companies to compensate their founders for their contributions to the business. These grants typically consist of a portion of the company's equity, which can be valuable as the company grows and matures. Here's how startup founder stock grants work.

What is Founder Stock?

Founder stock refers to the shares of a company that are owned by its founders. This can include both common stock and preferred stock, though typically is only common stock, and it represents a portion of the company's equity. Founder stock is typically issued at the time the company is formed and is customarily subject to vesting requirements and other restrictions.

The number of shares issued to the founders at incorporation can vary depending on a number of factors, including the size and stage of the company, the contributions of each founder, and the amount of capital invested in the business. Typically, the founders will receive a percentage of the company's total outstanding shares that is proportional to their contributions to the business.

Vesting Requirements

Startup founder stock grants are often subject to vesting requirements, which means that the founder must meet certain conditions before they can fully own the shares. Vesting can be based on time (e.g., the founder must work for the company for a certain period of time) or on performance (e.g., the founder must achieve certain milestones). Once the shares have vested, the founder owns them outright and can sell or transfer them as they choose.

The customary vesting schedule for founders in startups seeking venture capital is over a four-year period with a one-year cliff. This means that no shares vest over the course of the first year the founder is working on the business and, on the one-year anniversary, 25% of the shares vest. Then, 1/48th of the shares vest each month thereafter for the next three years until all shares are fully vested. Additionally, founder stock often contains double trigger vesting acceleration, which means that if (i) the company is sold and (ii) a founder is terminated within a period of time (usually 12 months) after the sale, the vesting for some or all of the founders then-unvested stock accelerates.

Tax Implications

Founder stock grants can have tax implications for both the company and the founder. For most US taxpayers, it is beneficial to properly file an 83(b) election within the 30-day window prescribed by the IRS to avoid realizing taxable income on their shares of the company.

Conclusion

Startup founder stock grants can be an important tool for attracting and retaining talented individuals and aligning their interests with those of the company's stockholders. These grants are typically made in common stock and are usually subject to vesting requirements and other restrictions. By granting equity in the company, founders have a stake in the company's success and are motivated to work towards its growth and profitability. It's important to split up the equity amongst the founders appropriately and carefully consider the terms of the stock grant to ensure that it aligns with the company's overall goals and objectives.