During the course of working on the start-up, our team didn't issue cofounder equity and built the product. Now we have an investor who is looking to purchase common stock and is requesting a 409A valuation. Needless to say, we don't want do a 409A and get hit with the higher fair market value since our start-up should essentially be worth $0.
Since the 409A is being asked for, how close to the 409A completion can the cofounder equity be issued without getting into a tax issue? Are there any examples of other start-ups issuing cofounder equity the week before getting a 409A done and then taking an investment? We've received two answers from two separate attorneys. Any guidance would be appreciated.
You find yourself in a predicament that many starts fall into. There are solutions to it, but none are particularly good, and they vary from situation to situation.
Bottom line though, is that you really need to get a 409a valuation immediately prior to issuing your "cofounder" shares. It would be best if the valuation is dated on even date with the issuance of the stock
Otherwise all you are doing is risking a lot for a little.
If you have not already done so, now is the time to secure competent legal counsel to guide you.