Qwestly Incorporation

https://dashboard.stripe.com/atlas

Section 83(b)

A Section 83(b) election is a form that lets the Internal Revenue Service (IRS) know you’d like to have your founder stock taxed at the time of purchase rather than at the time of vesting. If you make a Section 83(b) election, most importantly, you won’t pay taxes when your stock vests. Instead, you choose to pay very little (if any at all) taxes at the time of stock purchase, and you won’t owe taxes until you actually sell your stock.

Stripe Atlas will set up your company with 10,000,000 shares and a fair market value (FMV) of $100 (this is industry standard). After incorporation, Atlas completes the share purchase and issuance for all founders.

Key Equity Terms

Vesting schedule: 4-year vesting, 1-year cliff Founders will own 25% of their shares after 1 year at the company (the cliff). The remaining shares vest monthly over the next 3 years. Vesting begins on the date of incorporation.

Vesting acceleration: Double trigger Founder shares vest immediately if both (a) the company is sold and (b) the founder is terminated without cause after the sale.

Share purchase: Intellectual property (IP) Atlas founders pay for their shares with IP they have developed on behalf of the company. If you have developed significant IP, like patents worth substantially more than $100, Atlas might not be right for you.

Incorporating in DE

1. Favorable Legal System

• Delaware Court of Chancery – A specialized court that handles business disputes quickly and without juries. Judges are experts in corporate law, ensuring predictable and business-friendly rulings.
• Established Precedents – Decades of case law provide clear guidance on corporate legal matters, reducing uncertainty.

2. Business-Friendly Laws

• Flexible Corporate Structure – Delaware laws allow businesses to structure operations and governance flexibly, with fewer restrictions on things like board composition.
• Strong Privacy Protections – Delaware does not require businesses to disclose the names of officers or directors in public records, offering privacy.
• Investor-Friendly Rules – Venture capitalists and investors often prefer Delaware corporations due to the legal protections and standardized governance practices.

3. Tax Advantages

• No State Corporate Income Tax for Out-of-State Revenue – Companies that operate outside Delaware don’t pay corporate income tax on those earnings.
• No Sales Tax – Delaware does not impose sales tax.
• No Personal Property Tax – There is no tax on intangible assets like trademarks or patents.
• Low Franchise Taxes – For many startups, franchise taxes are relatively low compared to other states.

4. Flexibility in Incorporation

• Quick and Easy Setup – Incorporating in Delaware is fast and efficient, with online filing available.
• Fewer Residency Requirements – Directors, officers, and shareholders do not need to be residents of Delaware.
• Ease of Raising Capital – Delaware's laws make it easier for corporations to raise funds, issue stock, and attract investors.

5. Widely Recognized and Trusted

• Preferred by Investors and Banks – Many venture capital firms and investors prefer Delaware C Corporations because they are well-understood and trusted.
• Reputation – More than 60% of Fortune 500 companies and a majority of U.S. startups are incorporated in Delaware.

Tax impact of a Section 83(b) election in detail, with an example

This election impacts when you owe taxes and the amount that you’re taxed on your founder’s stock.

• Without a Section 83(b) election, you aren’t taxed at the time stock is issued to you. However, every time your stock vests in the future, you have to pay ordinary income taxes to the extent your stock value (often referred to as “fair market value”) has increased from the date you purchased your stock. When you sell your stock, you’ll owe capital gains tax on the difference between the value of your stock at sale and the value you were taxed on at vesting. (Capital gains tax rates on property held for more than one year are generally lower than ordinary income tax rates. The length of time you hold your stock is called the “holding period." If you don’t make a Section 83(b) election, your holding period begins when the stock vests.)
• With a Section 83(b) election, you only owe ordinary income taxes at the time of stock issuance to the extent the value of the purchased stock is greater than what you pay. If you pay fully for your stock at the time of your stock purchase, you should owe no additional income taxes. This is because our stock purchase agreement template presumes your stock value equals the issuance price (also called par value), reflecting that your company doesn’t have significant assets in it yet. If your company is beyond the “raw idea” stage, when the stock value as assessed by a 409a valuation is higher than the issuance price, consult with your tax advisor. When you later sell your shares, you’re taxed on the capital gains, which is the difference between the stock’s value per share when you sell it and the value when the stock was issued to you. Another advantage of making a Section 83(b) election is that your holding period begins earlier (when you’re issued the stock), which is typically a year earlier than when you vest the first round of the initial grant.

For example, your company issues you 200,000 shares valued at 0.0001 USD per share and you pay 0.0001 USD per share using cash. With an 83(b), you don’t have an income inclusion in the year the stock is issued as you paid for the value of the shares. If you don’t pay for the value of the shares using cash or other assets, a Section 83(b) election means you choose to include as ordinary income in the year the shares are issued the full value of the stock (20 USD). If half of your stock vests 1 year later and the other half vests 2 years later, you have no tax consequences because you made a Section 83(b) election. If 3 years from now you sell your stock for 2.00 USD per share (total of 400,000 USD), then you pay capital gains taxes on 399,980 USD (400,000 USD minus 20 USD).

If you don’t make a Section 83(b) election, you don’t have tax consequences on issuance of stock subject to vesting. However, if the value of your shares is 0.50 USD per share when half vest in 1 year then you would pay ordinary income taxes on 49,990 USD (0.50 USD value minus 0.0001 USD paid per share, multiplied by 100,000 shares) at vesting. If the value of your shares is 1.00 USD per share when the second half vest in 2 years from issuance, then you’d pay ordinary income taxes on 99,990 USD (1.00 USD value minus 0.0001 USD paid per share, multiplied by 100,000 shares) at vesting. If you sell your stock in 3 years for 2.00 USD per share (total of 400,000 USD), then you pay capital gains taxes on 250,000 USD (400,000 USD minus 20.00 USD paid for the shares, minus 149,980 USD).

Non-founder employees receiving stock subject to vesting are also eligible for a Section 83(b) election, but might have additional tax considerations at the time of stock issuance. We suggest they consult with their tax advisors before making the election.

C corporation vs. S corporation

A C Corporation (C Corp) is a legal business structure in the United States that is taxed separately from its owners. It is the most common type of corporation and provides several benefits, including limited liability protection for shareholders, meaning their personal assets are protected from business debts and lawsuits.

Key Features:

1. Separate Legal Entity. The corporation is treated as a separate legal entity from its owners (shareholders).
2. Limited Liability. Shareholders are only liable for the amount they invested in the company.
3. Double Taxation. Profits are taxed at the corporate level. If profits are distributed as dividends, shareholders must also pay taxes on those dividends.
4. Unlimited Growth Potential. Can issue unlimited shares and raise capital by selling stock, making it attractive to investors.
5. Perpetual Existence. The corporation continues to exist even if ownership or management changes.
6. Formalities. Requires strict adherence to rules, including holding annual meetings, maintaining records, and filing reports.

Pros:

• Strong liability protection.
• Easier to raise funds through stock sales.
• No limit on the number of shareholders.
• Credibility with investors, banks, and partners.

Cons:

• Double taxation.
• More regulations and paperwork.
• Higher costs to form and maintain.

Who Uses a C Corp? Larger businesses or those planning to scale quickly, go public, or attract significant investment often choose this structure. Examples include companies listed on the stock market like Apple or Google (Alphabet Inc.).

S corporation

An S Corporation (S Corp) is a special type of corporation in the United States that provides pass-through taxation, avoiding the double taxation faced by C Corporations. It combines the benefits of a corporation's liability protection with the tax advantages of a partnership or sole proprietorship.

Key Features:

1. Pass-Through Taxation. Profits and losses "pass through" to the owners' personal tax returns, so the corporation itself is not taxed. Shareholders pay taxes on their share of the profits at their personal income tax rates.
2. Limited Liability Protection. Shareholders are protected from personal liability for business debts and lawsuits, similar to a C Corporation.
3. Limited Number of Shareholders. Restricted to 100 shareholders or fewer. All shareholders must be U.S. citizens or residents (no foreign ownership).
4. Single Class of Stock. Can only issue one class of stock, but voting rights can differ.
5. Formation Requirements. Must first form as a C Corporation or LLC and then file Form 2553 with the IRS to elect S Corp status.

Pros:

• Avoids Double Taxation – Business profits are taxed only at the shareholder level.
• Liability Protection – Shields personal assets from business debts.
• Potential Tax Savings – Owners who work for the business can pay themselves a salary and take remaining profits as distributions, which are not subject to self-employment taxes.

Cons:

• Strict Ownership Rules – Limited to 100 shareholders and no foreign investors.
• Limited Flexibility – Only one class of stock can be issued.
• More Paperwork – Requires formalities like annual meetings and maintaining records.
• Salary Requirements – Owners must be paid a "reasonable salary" if working for the company, which can be scrutinized by the IRS.

Who Uses an S Corp? Small to medium-sized businesses looking for tax advantages and liability protection often choose this structure. It’s especially popular with family-owned businesses and service providers like doctors, lawyers, and consultants.

409A Valuation

A 409A valuation is an independent appraisal used to determine the fair market value (FMV) of a private company's common stock. It is named after Section 409A of the Internal Revenue Code (IRC), which governs how private companies handle deferred compensation, including stock options and equity grants.

Why is a 409A Valuation Important?

1. Stock Option Pricing – Determines the price employees must pay (the strike price) to purchase stock options. The strike price must be at least equal to the FMV to avoid IRS penalties.
2. Compliance – Ensures compliance with IRS regulations and prevents the company and employees from facing fines, additional taxes, or interest due to non-compliance.
3. Fundraising and Exit Events – Establishes a baseline valuation for equity-related events, including mergers, acquisitions, or IPOs.
4. Investor Confidence – Provides transparency to investors and employees about the company's valuation.

When is a 409A Valuation Required?

• First Issuance of Stock Options – Before offering stock options or equity to employees or stakeholders.
• Material Events – After significant changes, such as new funding rounds, mergers, or major revenue growth.
• Annually – Required to be updated at least once every 12 months to remain valid.

Who Performs a 409A Valuation? A third-party valuation firm or appraiser typically performs the assessment to ensure independence and accuracy. They use one or more valuation methods, such as:

1. Market Approach – Compares the company to similar public or private companies.
2. Income Approach – Projects the company’s future cash flows and discounts them to present value.
3. Asset-Based Approach – Values the company's tangible and intangible assets.

Consequences of Non-Compliance If the 409A valuation is not conducted properly, employees may face:

• Immediate taxation on their stock options.
• A 20% penalty on deferred compensation.
• Additional interest on unpaid taxes.

Who Needs a 409A Valuation? Private companies offering equity-based compensation, especially startups and early-stage businesses, need it to:

• Offer stock options legally.
• Provide a benchmark for company valuation.
• Protect themselves and employees from tax penalties.