Tax basis of founders shares of a start up business when new funding in raised.
A start up company is formed with 5 million shares authorized and 4 million of those shares are issued to the four founders for $0.01 per share.
If an investor is found and is willing to pay $2 million for the remaining 20% (1 million shares), will the original founders incur a tax liability due to the increase their share value?
Also, any citations or pertinent law review articles would be appreciated.
2 Answers from Attorneys
Re: Tax basis of founders shares of a start up business when new funding in rais
The purchase of the remaining 20% from the company for $2 million is not a realization event, a trigger, causing the others to have to pay a tax suddenly. It's a good benchmark to show that the value of their shares has gone from a penny to $2 but that doesn't trigger a tax yet.
There are many, many other issues for these lucky folks to consider here, having to do with what they do with their $2 million, assuming they keep it all in the business and don't try to pay themselves unduly high salaries. What does the business do? Are you one of the original 4? Are you an employee in the company?
Re: Tax basis of founders shares of a start up business when new funding in rais
What you describe is not a triggering event for recognition of any taxable income.
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