tax implications of not assigning ip early enough to a startup from founder


I'm the sole founder of a startup and I've incorporated a delaware c-corp, but have not yet issued any shares. I'm putting all that legal stuff off so I can focus on product development. Plan is to issue shares to myself and transfer over the IP to the company at a later point in time. However, I read this somewhere on the interwebz

"If you wait too long to set your structure up, you run into tax traps. Founders normally work for sweat equity and sweat equity is a taxable commodity. If you wait until your first funding event before setting up the structure, you give the IRS a measure by which to put a comparatively large number on the value of your sweat equity and you subject the founders to needless tax risks. Avoid this by setting up early and using cheap stock to position things for the founding team."

thoughts? what should i be doing to be in compliance with an overreaching and bureaucratic government / IRS, so everything is kosher to the "guns in power"


Incorporation Intellectual Property Shares

asked Aug 16 '11 at 10:38
6 points
  • How did you incorporate without issuing any shares? As far as I know you have to have some initial number of shares when you incorporate. – Tim J 13 years ago
  • There must be an authorized number of shares when the corporation is formed, but no shares are issued (if the process is done properly) until the board authorizes such issuance and the corporation receives the consideration (cash, IP, etc.) for the shares. – Dana Shultz 13 years ago

1 Answer


As the quote you provided says, the problem is not waiting, per se - it's waiting until a time close to a funding event, then issuing shares to yourself at a price substantially below the price paid by the investor.

Do you expect to seek money from one or more investors? If so, then issue your shares (in exchange for assignment of the IP) before you start looking for those investors.

Disclaimer: This information does not constitute legal advice and does not establish an attorney-client relationship.

answered Aug 16 '11 at 14:39
Dana Shultz
6,015 points

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Incorporation Intellectual Property Shares