Founder Readiness Check
10 Minutes Before You Build
Ten minutes, four questions, and an honest read on what you already know. No signup, no email, no timer counting down at you. If it turns out you know this material, it will say so.
Phase 1 of 4
A deadline most founders learn about after it has passed
You and your cofounder incorporate. You each buy founder stock at what it is worth on day one, which is almost nothing, and it vests over four years. From the moment those shares are issued, a thirty day clock starts.
You buy 4,000,000 shares at $0.0001 each. That is $400, and on day one it is a fair price, because the company is an idea and a bank account.
The shares vest over four years, so a quarter of them stop being forfeitable each year. That vesting is what starts the clock, and it is also what makes the next part expensive.
Election filed inside 30 days
Approximately $0 of ordinary income at transfer if the election is timely and the share value equals the amount paid
- Day 1Ordinary income at transfer is the share value minus what you paid, and here those are the same.$0
- Year 1Shares vest. No ordinary income is recognized at vesting.$0
- Year 2No ordinary income at vesting.$0
- Year 3No ordinary income at vesting.$0
- Year 4No ordinary income at vesting. What happens on a later sale is a separate question.$0
Election not filed
Approximate ordinary income recognized as shares vest, under the stated illustration
- Day 1No ordinary income is recognized at transfer. This is the part that feels fine.$0
- Year 11,000,000 shares vest, valued at $0.10 each. That value is ordinary income at vesting.about $100,000
- Year 2Another 1,000,000 vest at $0.60.about $600,000
- Year 3Another 1,000,000 vest at $2.00.about $2,000,000
- Year 4The last 1,000,000 vest at $4.00.about $4,000,000
Same shares, same company, same four years. The election does not remove tax. It changes when ordinary income is recognized, and on what value. Without it, roughly $6.7 million of ordinary income is recognized as the shares vest, on stock that cannot be sold. With it, approximately none is recognized at transfer. Whatever is owed on an eventual sale sits outside this comparison entirely.
The election is made under Internal Revenue Code section 83, at 26 U.S.C. 83(b). The IRS publishes Form 15620 for it. The figures above are ordinary income recognized under the stated illustration, not amounts of tax, and not your situation. This is not tax advice.
Phases 2 to 4
What the rest of the check asks
The remaining three phases are interactive, so they need JavaScript. Here is what they cover, in case you would rather read than click.
- Ownership is a fraction, and only the denominator moves
- This is the idea everything else in startup finance is built on, and it is the one that reliably catches experienced operators, because in every other business you have run, your share of the thing did not change while you slept.
- Now stack three of them
- One dilution event is arithmetic anybody can do. The reason founders are surprised is that these stack, and stacking is not adding. Predict this one before you move anything.
- Where you stand
- A read on which of 9 modules would actually be worth your time, based on the three answers you gave rather than on what would be convenient to sell you.