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I think there is a problem here gigamon. In your scenario when the C Corp acquires the assets of an LLC at 0 value or extremely low value - say 0.0001 c per uni
by iamyoohoo 19y ago
I think there is a problem here gigamon. In your scenario when the C Corp acquires the assets of an LLC at 0 value or extremely low value - say 0.0001 c per unit, then the founders common stock basically is assigned that value. If then right away, a VC pays say 3M pre money for a third of the company which may have 10 M shares - i.e. $1 per preferred share stock, the IRS will have a problem because the stock value cannot enhance by 10000 times so soon even if it is preferred stock. This is why lawyers ask entrepreneurs to form companies asap so that there is some time between founder share allocation and investment where you can show the company gained value from the time founders were allotted stock.
- gigamon 19y agoWill all due respect, iamyoohoo, it is done all the time, especially in Silicon Valley. Keep in mind that we are talking about a company that has no product, no revenues and is losing money (Founder's money). Then on one day, it has $5M in the bank and a Board of Directors of big name VC's. In fact, let's look at the problem in reverse. If the company is truly worth $15M (with the Founder's IP) and then then the VC's put in $5M to get 25% of the company, then why are we giving them preferred stock. The reason is simple. Until the company has the $5M, it was worth zero. In fact, even after the investment, we would price the common stock at 1/20 if not less of the preferred stock (so that future employees can get options at a discount price). --Denny--