Legal · Equity

How do you handle vesting when your partners are from different countries?

Kishore Swaminathan Serial entrepreneur looking for a cofounder

May 23rd, 2016

I am US-based and my partners are in India and China. We have all agreed that the company will be incorporated in the US; we have agreed on equity for each and vesting schedules. We have an MVP and lined up potential seed funders.

Here is the problem:

Personally, I can use an 83(b) election to avoid US taxes when my equity vests according to our vesting schedule. In both India and China, each vesting event will be taxable as "ordinary income" based on the company's value when their equity vests.

So, when we get funding (and hopefully revenue!) during the 3-year vesting period, my partners have to pay taxes on an illiquid, phantom valuation of a company as "ordinary income" in their countries. 

One option we've considered is for them to set a US-based LLC (with pass-through taxation), so that the LLC file an 83(b) and vest in the US; since the LLCs won't have any income (because of the 83(b)), my partners will have no pass through income or taxes either in US or their countries until a liquidation event. The problem with this is a lot of complication when we go for funding; not to mention the grey area of an LLC with an 83(b). 

A second option we have considered is for them to vest their equity as options; The problem with this is that, although it gets around taxes, it does not give them real ownership or voting rights. 

So, here are is my question: Has anyone else dealt with the problem of founders from different countries and how you've handled it; any recommendations for a lawyer who can help?

Guy Facey Partner, Facey & Associates

May 23rd, 2016

Idea - issue 1 share to those who have tax issues; and options for the rest of their equity: and staple the voting rights you want to the 1 share by adapting the ByLaws or Articles of Association Cheers Guy

Lester de Souza Building community for entrepreneurs

May 24th, 2016

Kishore, thanks for asking the question.  I am also interested in doing business in the US but am located in Canada so am not in a position to advise on US regulations.  However, wondering: are the interested parties are open to a more complex structure?  For practical reasons, multi jurisdictional structures are not unusual from the Canadian side.  If there is interest in exploring alternatives, a solution may incidentally benefit from the lower corporate tax rate on the Canadian side.

Kishore Swaminathan Serial entrepreneur looking for a cofounder

May 23rd, 2016

Well, that doesn't address the main issue. If or when they move to the US, they can take care of any liquidation-related taxes (capital gains). The insidious problem is vesting - and neither country has an equivalent of 83(b) [OMG: the US tax code is actually more rational & reasonable!], so if they will be bleeding every year as they vest (even if we get $100K funding, that will put them in the highest tax bracket in their countries). Options avoid this, but does not give ownership. 

Spencer Wolff Startup Lawyer at General Standards

May 23rd, 2016

Hi Kishore, You can just have them send their 83b Elections to the IRS in Austin Texas in the event that they ever move to the US and have to pay taxes later in their lives. If they never do, then officially they should declare the shares as income in their home countries as they vest, unless their home countries have similar regulations as the IRS' 83b. I'm a lawyer - here's my firm: Cheers, Spencer