How do founders get their company stock?
Takeaway: Founders must formally purchase their shares from the company at fair market value through a Stock Purchase Agreement, establishing clear ownership and starting the vesting process while avoiding unintended tax consequences.
A common and risky misconception among first-time founders is that they are simply “given” stock for creating the company. Legally, this is incorrect. To avoid tax problems and create a clean ownership record, founders must buy their shares from the corporation in a documented transaction. This is a core step in establishing the company’s capitalization and will be scrutinized in future investor due diligence.
The Stock Purchase Agreement (SPA)
The SPA is the contract between the founder and the company that governs the sale of stock. It is approved by the board and signed by each founder. Key terms include:
Number of Shares: Specifies the exact number of common shares you are purchasing.
Purchase Price: Paid at the initial fair market value—often a fraction of a cent per share at incorporation (e.g., $0.00001). This allows you to buy millions of shares for a small total cost, but payment must be real and documented.
Vesting Schedule: Most venture-backed startups require founder shares to vest over time, typically four years with a one-year cliff. If you leave before full vesting, the company can repurchase unvested shares at the original price.
Why a Formal Purchase Matters
Granting stock for free in exchange for services creates taxable income equal to the stock’s fair market value on the date of the grant. By purchasing the stock at fair market value at incorporation—when that value is essentially zero—you avoid immediate taxable income.
A signed SPA, along with proof of payment (such as a canceled check or wire confirmation), is the standard, investor-expected way to establish ownership. Done properly, it protects against tax issues, creates a defensible legal record, and demonstrates sound corporate governance from day one.
Disclaimer: This post is for general informational purposes only and does not constitute legal, tax, or financial advice. Reading or relying on this content does not create an attorney–client relationship. Every startup’s situation is unique, and you should consult qualified legal or tax professionals before making decisions that may affect your business.