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To Founders > Acceptable Consideration - Pg. 38

First Steps 38 Figure 2.11. The 83(b) election can minimize the tax bite of vesting equity compensation. Fortunately, the IRS allows you to escape this by filing an 83(b) election within 30 days of the initial purchase of your shares. An 83(b) election is an agreement to pay the amount of tax that would be due if the stock were not subject to vesting. Essentially, you pretend that you have received all of the stock at the date of the election, and pay whatever tax would be due if that were the case. Usually, it is zero, because you will be paying fair market value for the stock and, because there will not have been any appreciation in the stock's value, there will be no spread. LTCG tax will be due when the stock is ultimately sold. Acceptable Consideration It surprises many founders that they are required to furnish valid consideration (payment) for their stock, or face IRS income tax. State laws regarding acceptable consideration vary, so check your state statute for restrictions. Cash and most kinds of property with a documentable value are ac- ceptable. Fortunately, founder stock is usually very inexpensive, $.01 per share, so cash-strapped entrepreneurs can afford to buy a stake in their own company. Some states allow past services, but others do not consider the promise of future services or other promissory notes to be valid. If you are contributing property, you will want to avoid paying income tax on the value of the shares you receive by making a Section 351 election. This is available if and only if: · The property is transferred solely in exchange for stock of the company; and, · Immediately after transfer, all transferors (cash and property, not solely service providers) own stock with at least 80 percent of combined voting power of all classes of stock entitled to vote and at least 80 percent of total number of shares of each non-voting class. If there will be more than one transferor, the transfers do not need to be simultaneous, but rights need to have been defined in an agreement and documents effecting the transfers need to be summarily executed. You need to file a 351 election on your tax return to receive this treatment. If you do not qualify for a 351 election, you will likely pay income tax on the receipt of shares and qualify for capital gains treatment on any appreciation thereafter. Note CAUTION If a founder will be donating property, she shouldgive assurances that she owns all rights in and tothe property, especially if it's intellectual property.Otherwise, the company could be liable for damages to third parties caused by the use of theproperty, for example, if it were stolen. It is also afine idea for the company to obtain guaranteesand indemnifications from the transferor or third-party insurance in case problems arise.