"Founder" Shares Taxation

[Catherine T]

Hi. Just wondering if anyone has experience of the following:

1. Co Founders of a tech startup company hire (as a contractor) an individual on a Spanish contract to develop code for startup. Contractor is UK resident.
2. A year in, company is redomiciled to Delaware and that entity issues shares to the co founders and the contractor. Note: nothing in the contractor's contract about the shares -- this was all a without prejudice gentlemen's agreement which is finally materialising.
3. Company has no customer contracts yet (none in pipeline with any prospects). Angel investor likely investing for 10pc of company in December (valuing the company at £3m in all likelihood at that time...)

Questions:

1. If shares are issued now to UK resident contractor, is there a tax point at this juncture ie point of issuance? Company has no real value (no revenue, no contracts in pipeline) but clearly if an angel is coming onboard and a valuation has been talked about, then this must have some sort of value now??

2. What are the tax issues to consider? In my mind, possible tax issues:
a. Q1 above -- ie taxation of shares granted this month
b. capital gains when there is either a trade sale or IPO --- what is the cost base? Are there reliefs? Anything to worry about now?
c. Does anyone know whehter there are any US tax considerations at this point in time?


Thanks!

[bd6759]

Difficult with the limited information. Context is everything. Not looking at your questions, but at the facts:

1. What is the relevance of the language in which the contract is written.

2. What is meant by “redomiciled?” Do you think it is possible to transfer a registration from one jurisdiction to another.

3. No contracts and no prospects in the pipeline, yet worth £3million. Must have significant liquid assets.

[Catherine T]

@bd5679

Answers to your questions (could not tell if you were being serious or just treating me like I am some imbecile):

1. Spanish refers to the jurisdiction of the contract ie a contract governed by Spanish law
2. Redomiciled -- no I don't mean transfer a registration. The company moves to Delaware ie is reincorporated there. Companies do it all the time. The point of the sentence was to explain that the issuer is now a Delaware company.
3. Agree that the valuation is odd....but they may be taking a view based on the quality of the MVP. People do do that......

[bd6759]

As I said, context is everything.

1. I have no idea what is in the contract, what sort of contract it is or what it is for, but if it is a contract for service, or even a contract of service, the UK contractor will be taxed on whatever he receives in exchange for his service. This can be in cash or in kind. For what it is worth, I’d venture that the agreement is part of the contract whether in writing or not.

That said, and I don’t profess to be an expert, are you sure that a Delaware LLC has stock or stockholders? My limited understanding is that, although bodies corporate, they have members like a UK partnership.


2a. The UK contractor will pay income tax on the value of the shares. Nobody will be able to say if it has value or not without conducting a valuation. The market value of anything is whatever an unconnected fully informed person, trying to get the best deal, would pay for it.

2b. Not sure what disposal you are referring to. If the contractor sells any shares he acquires he will be liable to CGT. His base cost is the MV (the amount he was taxed on) when he acquired them.

The sale of the business and assets to the Delaware company may have tax consequences.

2c. The company is in the US so will have US tax on its profits. It’s important to get it right because there will be a myriad of pitfalls with double taxation given the different ways that the US and UK treat the profits.

You are not going to get the proper advice you need without sitting down with a professional to discuss your needs and reasons why you want this structure. Good advice us a commodity, and it comes with a significant price tag.

[AGoodman]

I've assumed redomiciled just mean the original entity (if any) was dumped and they incorporated a fresh business in Delaware.

Not my area but I suspect it is common problem for "founder" shares to be issued a bit too far down the line.

By default, I should think the market value of the shares are subject to UK income tax (and possibly Class 4 NI) in the contractor's hands (if contracting individually) because they are receipts of his or her trade.

The only lacunae may be if there is some clear evidence of an earlier agreement that he/she would be issued shares so you might try to fix the value at that date. You would want some expertise on that argument. Failing that you should get some expertise on the share valuation to see how far you can legitimately reduce the value for what is presumably a small minority of the share capital.

There are bound to be some US tax issues here (including possible filing obligations) but I have no idea what. There are a number of good US/UK tax specialists in the UK who could advise.

If the shares have not yet been issued, they should definitely get some advice from an incentives expert to see what might be done to depress the value for tax purposes and whether any special regimes might apply to a US company issuing shares (it won't help that he/she is a contractor rather than officer/employee).