Issuing founder stock is one of those “simple” steps that quietly defines the future of your company. Get it right and you have a clean foundation that investors, employees, and regulators will trust. Get it wrong and you’ll spend months cleaning up mistakes that could have been avoided with a few careful decisions at the start.

This guide is built for busy founders who need clarity, not legal jargon. By the end, you’ll understand exactly how to structure founder stock, set par value correctly, and avoid the most common equity mistakes startups make.

Here’s what we’ll cover:

• What founder stock really is and why it matters
  
  
• How par value works and why you should care
  
  
• A practical, step-by-step guide to issuing stock the right way
  
  
• Real-world examples and mistakes that derail startups
  
  
• A founder-friendly checklist to keep your equity clean
  
  

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What is Founder Stock and Why It Matters

The Basics

Founder stock is the first issuance of equity to the people who created the company. It’s usually common stock purchased at a nominal price right after incorporation.

Unlike investor stock, founder stock doesn’t come with special rights or liquidation preferences. But it does come with one critical function: it defines who owns the company.

Why Investors Care

VCs and angels want to invest in companies with “clean” founder equity. That means:

• Shares were issued right after incorporation, not months later at a questionable valuation.
  
  
• Founders bought their shares with actual consideration (usually cash).
  
  
• Vesting schedules exist to protect against founder breakups.
  
  

[INTERNAL LINK: Why Investors Insist on Vesting for Founders]

Why the IRS Cares

Founder stock issuance intersects directly with U.S. tax law. If it’s not documented and valued correctly, the IRS can argue that equity is compensation subject to income tax. That’s why par value, stock purchase agreements, and 83(b) elections matter.

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The Core Framework for Founder Stock and Par Value

Breaking Down Par Value

• Definition: A legal minimum value per share set in the Certificate of Incorporation.
  
  
• Practical use: Establishes the minimum contribution required for each share.
  
  
• Investor impact: Investors don’t care about par value directly, but they care about the cap table being legally valid.
  
  

Example:
A Delaware C-Corp sets par value at $0.0001. With 10 million authorized shares, founders buy 8 million at $0.0001, paying $800 total. This creates valid consideration and aligns with corporate law.

Common Stock vs Preferred Stock

• Common stock: Issued to founders and employees. Basic ownership.
  
  
• Preferred stock: Issued to investors. Includes liquidation preferences, anti-dilution rights, and sometimes voting rights.
  
  

Investors are happy as long as the founder stock is clean and well-structured. Problems arise when founders over-issue themselves shares without vesting, or set par value incorrectly.

Vesting Schedules in Practice

The most common founder vesting schedule is 4 years with a 1-year cliff. But some scenarios call for adjustments:

• Two co-founders where one is part-time: accelerated vesting may not be fair.
  
  
• Multiple founders with unequal risk contributions: differential vesting may be used.
  
  

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Step-by-Step Guide to Issuing Founder Stock

Step 1: Incorporate the Company

• Choose Delaware C-Corp if you intend to raise venture capital.
  
  
• File a Certificate of Incorporation with authorized shares and par value.
  
  

Case Study:
A startup incorporated in California and issued stock without vesting. When one founder left, they walked with 40% of the company. VCs refused to invest until the shares were restructured — which cost legal fees and took 6 months.

Step 2: Authorize Shares

• Common practice: authorize 10 million shares.
  
  
• Founders typically split 6–8 million among themselves.
  
  
• Leave room for an option pool and investors.
  
  

Why 10M?
It’s arbitrary but practical. It gives psychological comfort (“I own 1,000,000 shares”) and flexibility for later financing rounds.

Step 3: Set Par Value

• Keep it low: $0.00001–$0.001 per share.
  
  
• Consistency is critical — match across documents.
  
  

Scenario Comparison:

• Par = $0.01: Issuing 8M shares requires founders to pay $80,000 upfront.
  
  
• Par = $0.0001: Issuing 8M shares requires $800 total.
  
  

Guess which one most founders prefer.

Step 4: Execute Stock Purchase Agreements

• Each founder signs a purchase agreement specifying:
  
  
  
  • Number of shares
    
    
  • Purchase price
    
    
  • Vesting terms
    
    
  • Rights of repurchase if unvested shares are forfeited
    
    

Step 5: Adopt Vesting

• Default: 4-year vesting, 1-year cliff.
  
  
• Consider acceleration clauses for acquisitions, but keep them simple.
  
  

Example:
Company A included double-trigger acceleration. When acquired, founders who stayed onboard retained unvested shares. Investors liked the protection, and founders had fair upside.

Step 6: File 83(b) Elections

• File within 30 days of stock issuance. No exceptions.
  
  
• This election lets founders pay tax upfront on par value (nearly zero) instead of on future appreciated value.
  
  

What happens if you miss it?
If the company is later valued at $1/share and you vest 2 million shares, you could owe tax on $2M of “income” even if you can’t sell the stock.

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Common Mistakes to Avoid

1. Setting Par Value Too High

Fix: Always set it at the lowest legally allowed number.

2. Skipping Vesting

Fix: Protect the company and future investors with standard vesting schedules.

3. Missing 83(b) Election Deadline

Fix: File immediately. Use certified mail and keep copies.

4. Over-Issuing Shares to Founders

Fix: Leave enough authorized shares for employees and future rounds.

5. Handshake Equity Agreements

Fix: Use formal stock purchase agreements. Handshakes don’t survive due diligence.

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Case Study: The Cost of Getting It Wrong

Startup Alpha

• Two founders split 50/50 ownership with no vesting.
  
  
• One left after six months.
  
  
• The departing founder owned 50% permanently.
  
  
• Investors refused to invest.
  
  
• Resolution: $50K in legal fees, a painful restructuring, and lost funding opportunities.
  
  

Lesson: A clean equity setup from day one saves time, money, and stress.

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Practical Checklist for Founders

• Incorporate as a Delaware C-Corp.
  
  
• Authorize ~10M shares.
  
  
• Set par value at $0.00001–$0.001.
  
  
• Execute stock purchase agreements.
  
  
• Adopt 4-year vesting with 1-year cliff.
  
  
• File 83(b) election within 30 days.
  
  
• Maintain an updated cap table.
  
  

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Conclusion and Next Steps

Issuing founder stock and setting par value correctly is not optional. It defines who owns the company, how taxes are handled, and how attractive you are to investors.

Key takeaways:

• Set par value extremely low.
  
  
• Adopt standard vesting from the start.
  
  
• File your 83(b) election immediately.
  
  
• Use proper documentation, not informal agreements.
  
  
• Keep your cap table clean for fundraising.
  
  

Startups that get this right raise faster, avoid founder disputes, and save thousands in legal clean-up.

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