Reblog – Finance Fridays

Brad Feld just sent out his first Finance Fridays post called “Getting Started -Allocating Equity and Founder’s Investment”.

This post is not about financial statement literacy, but is meant to begin setting the stage for the hypothetical company that will be the subject of the Finance Fridays series.  In particular, this first post deals with allocating initial equity between 2 founders.  I posted a comment to the post as follows:

“Brad, the split could have been 50/50 regardless of Jane’s $$ contribution, right?  My point is that while Jane and Dick negotiated the split is was basically arbitrary.

Also, someone recently argued with me that in your scenario Dick would actually have taxable income on the value of his shares based on the value “attributed” to the shares derived from Jane’s investment and implied valuation.  I argued “no” and that Jane’s cash investment would just increase the tax basis of her shares.   Do you agree?”

My comment was based on a situation that I was just encountered in which one founder was putting in real cash and the other 2 founders were putting in IP and sweat.   An advisor took the position that if Founder “A” put in $60K and got 33% of the company, then the other Founders “B” and “C” (who also got 33% of the company) would have taxable income of $60K each.  I argued against this position instead saying that Founder A would simply have $60K added to his tax basis in his shares (so that when Founder A sold the shares later his gain would be $60K less).  And that Founder B and C would be unaffected…….and that this situation happens all the time!

Hopefully I will get some responses to the comment and let you know.  Chime in.