Founder stock issuance: the paperwork that makes it official

If you've incorporated a Delaware C-Corp and agreed on the founder split, the shares still don't exist until the paperwork behind them does. A cap table spreadsheet showing each founder's percentage is a plan. The ownership becomes legal when a specific set of documents is signed, paid for, and recorded, in the right order.

A founder stock issuance is official when the board approves it, each founder signs a stock purchase agreement and pays the purchase price, the founder assigns related intellectual property to the company, and the company records the issuance in its stock ledger. If the shares are subject to vesting, each founder then files an 83(b) election within 30 days of the transfer.

Below is what each document does, what it should contain, and what happens when one is missing.

Five documents make up a founder issuance

Some founders also sign a spousal consent and a confidential information and invention assignment agreement. Each is covered below.

The board consent authorizes the issuance

Under Section 152 of the Delaware General Corporation Law, the board must approve every stock issuance and determine the consideration the company will receive. At formation this is usually done by unanimous written consent rather than a meeting.

The initial board consent typically covers several actions at once: adopting the bylaws, appointing officers, and approving the founder stock issuances. For the issuance, the consent should state the name of each founder, the number of shares, the price per share, the form of payment, and the vesting terms.

Approval comes first. Shares issued before the board approves them are defective. The consent should be dated on or before the date the stock purchase agreements are signed.

The shares must already be authorized. The total issued cannot exceed the number of authorized shares in the certificate of incorporation. Any shares reserved for a future option pool are not available for founder grants.

The stock purchase agreement sets the terms

Each founder signs a restricted stock purchase agreement with the company. It is the document that investors and acquirers read most closely, because it defines what happens to the shares if a founder leaves.

Shares and price. The number of shares and the price per share, which is usually at or just above par value, such as $0.00001.

Vesting schedule. Most founders vest over four years with a one-year cliff: 25% at the one-year mark, then monthly over the next three years. Credit for time worked before incorporation is sometimes negotiated.

Repurchase right. The company's right to buy back unvested shares, usually at the original price, if the founder stops providing services. This is what makes the shares restricted for tax purposes.

Acceleration. Whether vesting speeds up if the company is acquired. Double-trigger acceleration, which requires both a sale and the founder's termination, is more common than single-trigger.

Transfer restrictions. Limits on selling or transferring the shares, including a company right of first refusal.

Spousal consent, where relevant. In community property states such as California and Texas, a founder's spouse may have a property interest in the shares. A signed spousal consent keeps the repurchase right and transfer restrictions enforceable against that interest.

Payment and IP assignment are what the company receives

A stock issuance needs consideration, meaning something of value the company receives for the shares. Delaware law permits cash, property, services, or other benefits to the corporation, as determined by the board.

Cash is the cleanest form. At a par value of $0.00001, a founder buying 4,000,000 shares pays $40. The payment should be traceable, from the founder's account to the company's, with the date matching the agreement date. If the company's bank account isn't open yet, the company should record when and how the payment was received.

IP assignment is usually part of the deal. Founders often write code, build prototypes, or register domains before incorporating. That work belongs to the founder until it is assigned. The assignment can be part of the stock purchase agreement, where the IP counts as part of the consideration, or a separate technology assignment agreement. Either way, it should cover everything related to the business created before the issuance date.

Future IP is a separate document. A confidential information and invention assignment agreement covers IP a founder creates while working for the company going forward. Founders sign one alongside the stock purchase agreement, just as employees do.

Stock records show who owns what

Once the shares are paid for, the company records the issuance.

Stock ledger. The ledger lists each stockholder, the number and class of shares, the issuance date, and the consideration paid. It is the company's official record of ownership, and the cap table should match it.

Certificated or uncertificated shares. Delaware allows either. Most early-stage companies now use uncertificated shares. Under Section 158, the board can authorize uncertificated shares, and the company must then send each stockholder the written notice required by Section 151(f), which includes the transfer restrictions that would otherwise appear on a certificate legend.

A single document folder. The board consent, signed agreements, payment record, ledger entry, and each founder's 83(b) proof of filing should sit together in the company's records. That set is what a lawyer will ask for during the first financing.

The 83(b) and securities notices follow the issuance

83(b) election. Founder shares subject to vesting are taxed as they vest unless the founder files an 83(b) election within 30 calendar days of the transfer date. The election moves the tax to the transfer date, when the value of the shares usually equals the price paid and the taxable amount is zero. The deadline cannot be extended, so founders should file the week the stock is issued and keep proof of mailing.

Securities law. A founder stock issuance is a sale of securities. It is typically exempt from federal registration as a private offering, with no federal filing required. Some states still require a notice filing when shares are sold to residents of that state. California, for example, has a notice requirement for issuances to California residents.

Missing paperwork surfaces in diligence

Founder issuance problems rarely come up at formation. They come up when investor counsel reviews every issuance against the charter and board consents before a priced round or acquisition.

No board consent, or one dated after the issuance. The issuance may be defective and need ratification under DGCL Section 204.

No record of payment. The consideration may not have been received, which can make the shares invalid.

No IP assignment. Investors may require the founder to assign the IP before closing. That is harder if the founder has since left.

No 83(b) proof. A founder without proof of filing may face ordinary income tax on shares as they vest, and there is no late election.

Shares exceeding the authorized amount. The excess shares are defective and require ratification and a filing with Delaware.

Each of these is cheap to prevent during formation and expensive to fix later, when it adds legal fees and can delay closing.

How Inkle fits in

Inkle Incorporation assists with Delaware C-Corp incorporation.

The bottom line

A founder issuance is a short transaction that relies on documents lining up: board approval before the shares are sold, a signed stock purchase agreement with vesting and repurchase terms, a traceable payment, an IP assignment covering everything built before formation, a ledger entry, and an 83(b) election filed well inside 30 days. None of these take long to complete when the company is formed. All of them are checked in the company's first diligence, and a missing one tends to surface at the moment the company least wants a delay.

Frequently asked questions

What documents are needed to issue founder stock?

A board consent approving the issuance, a restricted stock purchase agreement for each founder, an IP assignment, a record of payment, and an entry in the company's stock ledger. If the shares vest, each founder also files an 83(b) election within 30 days.

Do founders have to pay for their shares?

Yes. A stock issuance needs consideration, and founders usually pay cash at or above par value. At a par value of $0.00001, 4,000,000 shares cost $40. The company should keep a record of the amount and date paid.

Can founders pay for stock with intellectual property?

Yes. Delaware law allows property, including intellectual property, as consideration if the board approves it. Many founders assign pre-incorporation IP as part of the stock purchase agreement, often alongside a small cash payment.

Do founder shares need stock certificates?

No. Delaware allows uncertificated shares if the board authorizes them. The company must then send each stockholder a written notice with the information that would otherwise appear on a certificate, including transfer restrictions.

What happens if founder stock was issued without board approval?

The issuance may be defective. Delaware allows companies to ratify defective stock issuances under DGCL Section 204 through board and, where required, stockholder action. Fixing it before a financing avoids delays in diligence.

Does founder stock issuance require a filing with the SEC?

Founder issuances are usually exempt from federal registration as private offerings and require no SEC filing. Some states require a notice filing when shares are issued to their residents.