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Ownership of a Corporation: Equity > To Founders - Pg. 37

First Steps To Founders 37 Generally speaking, founders and employees will receive common stock subject to vesting. Another incentive to incorporate early and issue stock is that if you wait until the eve of a financing--for instance, if you will be receiving an equity investment from a publisher--the IRS could deem it as discounted stock and tax you on the spread. Stock versus Options Founders can take stock or options, but stock is generally the wiser choice for two reasons. 1. 2. If a founder will not be an employee, she will not qualify for a tax-privileged option plan. Capital assets such as stock must be "held" for a certain amount of time to gain special tax status, 12 months to be a LTCG and five years to be QSBC. Stock is a capital asset (assuming that it is vested or the owner has filed an 83(b) election, discussed in the 83(b) section, which follows), but stock options are not, meaning that holding periods only begin running when stock is purchased. If you qualify for the QSBC exemption (see Sidebar: Small Business Corporation Stock), you will want to start the five-year holding period as soon as possible. Vesting Vesting, where the company retains the right to repurchase some or all of a stock/option grant until certain dates, is a mechanism for the corporation to grant stock or options while retaining the right to repurchase them should the employee leave the company. Cliff vesting is the norm, whereby some amount of a grantee's stock will vest at the end of a long period, say, one year, and the remainder will vest monthly over, for example, the next three years. Note NOTE