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OCV Public Handbook/🏢Company Formation/📄Step 4: Issue equity to founders and advisors

Step 4: Issue equity to founders and advisors

Founder share purchase

Founders are recommended to purchase (for a nominal amount) common shares in OCV companies (as opposed to receiving options). This is, however, dependent on each founder’s personal tax situation - please consult with tax advisors.
When a company issues common stock, it sells ownership stakes in the company differently than it would to investors - the price of purchasing common stock is nominal for the company’s founders but may change over time with employees (see
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409A Valuation).
The wiring of funds to execute the share purchase agreement needs to be completed prior to OCV SAFE funding.
It is strongly advised for founders to seek tax counsel from professionals who are experts in working with founder equity in venture-backed startups.
See additional details under
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Global Workforce Considerations: immigration if work visa transfers are required.

Options

Common shares are usually reserved for founders, employees, and other stakeholders.
Options give the holder the right to buy common stock at a specified price for a certain period of time and may be used as a form of compensation for employees and advisors. Though options are a right to buy common stock, they are not the same as actual shares of stock.
See also (
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Stock Options).

Guidelines for equity stakes

Disclaimers

The following guidelines are:
  • subject to change
  • not a guarantee anyone will get any specific equity stake
  • not necessarily a perfectly up to date reflection of current frameworks
  • not going to impact past dealings
    • We will stick to the terms of previous arrangements regardless of if they are higher or lower than the current framework.

Founder shares guidelines

Vesting Period: Four years (48 months), no cliff
CTO
Minimum of 10% (Y Combinator Founder Norm)
Additional equity may be allocated as follows:
  • Contributor to the project: + 5%
  • Original author of the project: + 5%
  • First C-level hire at the company with management and entrepreneurial experience : +5%
Maximum of 25% (otherwise we can't make our model work)
CEO
Our standard model is to launch a company with a technical co-founder first and recruit a CEO six to nine months after. CEOs recruited after company launch will receive stock options from the company’s options pool. See CEO equity reserve at
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Step 5: Establish the company’s options pool. Under special circumstances, we would consider launching with only a CEO or both CEO and a CTO together. Guidelines for CEO equity at launch would be similar to the CTO at launch.

Advisor shares guidelines

This section is intended for advisors, project authors, who helped making company launch a reality. For advisors coming onboard after company formation, see
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Advisors.
Minimum of 0.25%
  • Original author of the project (assuming a single author): + up to 1.5%
  • Time commitment to advise the company on monthly basis: + up to 0.25%
  • Active involvement in building the business (i.e. contribute to brand building, customer introductions, recruiting, etc.): + up to 0.5%
    • Merge requests improving the open source project are not considered to be active involvement in building the business.
Maximum of 2.5%.
Vesting Period: Four years (48 months), no cliff.

83b Election

Filing an IRS 83b Election is extremely crucial for founders and the company. Failing to do so has significant tax implications to both.
83(b) elections are required to be filed only if/when:
  1. a stockholder purchases common stock subject to vesting (i.e. typical OCV founder shares issued during company formation stage); or
  1. if an option holder early exercises an option that is subject to vesting. See
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    Stock Options    : early exercise.
83b Election form needs to be completed by the founders and sent to the IRS (via certified mail with return receipt) within 30 days of the effective date of the stock purchase agreement (the date wires are sent).
A self-addressed return envelope need to be included as well. As part of the company formation process, the Legal Team will provide the latest instructions and template form for 83b Election. For non-US founders, OCV will assist with creating a FedEx return label to be included with the self-addressed return envelope.
The appropriate IRS office to send the election to can be found via https://www.irs.gov/filing/where-to-file-addresses-for-taxpayers-and-tax-professionals-filing-form-1040 (those with no payment enclosed).
Non-US founders should use the following address.
Department of the Treasury Internal Revenue Service Austin, TX  73301-0215 USA
To document the completion of this process, founders must provide the following three items to the company’s legal team via e-mail:
  1. A copy of the completed election form,
  1. Proof of certified mail sent to the IRS (e.g., a photo of a receipt with a tracking number), and
  1. Proof of self-addressed return envelope from the IRS.