On Jun 4, 2007, at 4:35 AM, Mark Waser wrote:
This kinds of things are pretty strictly regulated now, and
waiting until the end to contract a stake to your contributors
would be a disaster for them in terms of both their return and/or
tax liability,
If you're waiting until the end to distribute shares/equity, the
immediate tax liability is nasty because it is counted as a sudden
transfer of value. The return, however, if the shares/equity were
sold immediately is exactly the same as if they owned it all
along. If, however, ongoing profits are simply distributed
(instead of equity), there is no problematical sudden transfer of
value. And realistically, there aren't going to be profits pre-AGI.
Depending on how the nominal value is disbursed, the true financial
value can vary significantly. Other than outright equity,
Instruments like profit distribution are about the worst in this
regard, instruments like warrants are among the best (but you can't
give those to just anyone), and most other instruments fall somewhere
in the middle. The difference is significant: the real return
between the best and worst can easily be 2x. (Depending on your
specific type of interest in a company, an argument can be made that
warrants can be more valuable than equity.)
The closest *decent* way to do what you want to do is to contract
options upfront with modifying conditions and qualifications based
on future performance.
Do you believe that you could successfully do that? Would you be
willing to write up an initial shot at it?
Since many startups in Silicon Valley do exactly this, I would say
that it is quite doable. It is less flexible and accurate than
waiting until the end to make determinations of value, but it is a
fair proxy and both parties have to agree to it anyway. If
structured well, bits can frequently be negotiated off-contract later
if conditions change. It is how startups deal with things like high
rates of churn. Personally, I do find the current state of
regulation to be irritatingly inflexible.
Cheers,
J. Andrew Rogers
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