Capital Contributions

Founders of a new corporation may contribute cash to the corporation, to help the corporation start operating.

Some founders are tempted to simply increase the purchase price of their common stock, to get the desired amount of capital into the corporation when they pay for their shares. Most startup lawyers recommend against this approach because it can affect the FMV of the common stock. The value of equity compensation for employees and consultants is tied to the difference between the common stock FMV at the time of issuance, and the price at which the equity is eventually sold. Therefore, startups typically try to avoid prematurely causing an increase in the common stock FMV, to maximize the value of the equity compensation.

Instead, founders typically contribute cash to the corporation in the form of a simple loan. With a simple loan, the company would be obligated to repay the founder at a later time, along with nominal interest.

Alternatively, some founders structure the contribution as a seed investment in the form of a convertible note or safe. Founders should consider the impact a seed investment will have on control and relative economic outcomes, and any resulting side-effects on working relationships. Some future investors may seek to undo founder seed investments, if they feel the economics are too founder-friendly.

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