Should founders pay for their stock in cash or contribute intellectual property?

If a founder owns intellectual property, which he plans to assign to the company, he may want to use it as a payment for his stock instead of paying cash. It can certainly be done and it will be a valid form of consideration. However, there are some risks associated with paying for stock by assignment of IP rather than with money. Depending on the nature of IP it may be:

·        Difficult to fully and accurately describe the scope of assignment

·        Difficult to put monetary value on the assigned IP

·        Putting a monetary value on assigned IP can affect the price of company’s stock, which have to be accounted for in tax documents (it is usually recommended not to trigger valuation event without necessity)

·        Potentially bring tax ramifications (the contribution must be reviewed by an experienced accountant to ensure it is tax free for a company)

 

Typically when a company is registered par value of its stock is set at $0,0001 per share and this is the price founders have to pay for their shares. Even if a founder acquires 4,000,000 of the company’s shares, the price he has to pay to the company is $400. Accordingly, I usually advise founders to pay cash for their shares to avoid any issues. If there is an IP to be assigned to the company regardless, I prefer to effectuate it by a separate assignment agreement unrelated to the value of the company’s shares.

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