Resources for insight and
inspiration
Guides
Insights
Drag-Along Rights in Startup Financing: Streamlining Exits While Balancing Stakeholder Interests
When negotiating startup financing, founders often focus on valuation, equity splits, and immediate ownership. But long-term provisions in term sheets can be just as important, especially when it comes to company exits. One of the most impactful is the drag-along right.
Anti-Dilution Rights in Startup Funding: The Price Protection Mechanisms That Safeguard Investor Value
When structuring venture capital deals, founders often focus on valuation, investment size, and ownership splits. But within preferred stock agreements are provisions that can significantly reshape economics if future fundraising happens at lower valuations. Chief among these are anti-dilution protections.
Liquidation Preferences in Startup Funding: Critical Terms That Shape Exit Outcomes
When negotiating startup financing rounds, founders often focus on valuation, investment size, and ownership percentages. However, hidden within term sheets are provisions that can dramatically impact how exit proceeds are distributed. One of the most important of these provisions is the liquidation preference.
SAFEs: Streamlining Early-Stage Startup Investments
In today’s fast-moving startup ecosystem, the Simple Agreement for Future Equity (SAFE) has reshaped how early-stage companies raise capital. Introduced by Y Combinator in 2013, SAFEs were created to simplify fundraising while balancing the needs of both founders and investors.
FAQs
Open allYou risk IRS penalties, employee tax liabilities, and potential challenges to the legitimacy of your equity compensation program.
Investor valuations reflect potential future value, while 409A valuations reflect the fair market value of common stock today.
At least once every 12 months, and sooner if there are major business or funding events.
It ensures your stock options are priced at fair market value, protecting employees and the company from IRS penalties.
Both create dilution, but investors often prefer structures that are clearly documented and aligned with the company’s stage. RSAs may be easier at incorporation, while RSUs are common once valuation increases.
It depends on company stage. RSAs can be advantageous early on, while RSUs may be more predictable in later-stage or pre-IPO companies with higher valuations.
No. Only RSAs (and certain stock options) are eligible for the 83(b) election. RSUs are taxed when delivered, typically at ordinary income rates.
RSAs are generally more effective for very early-stage startups with low valuations, since they allow employees and founders to lock in minimal tax liability through an 83(b) election.
The best approach is to consult with a tax advisor. They will assess your grant type, company valuation, and personal tax situation.
Not always. It only makes sense if the stock is likely to increase in value. If the company fails, you cannot recoup the taxes you paid upfront.
Yes, but only if you receive early-exercised options or restricted stock. Standard vested options are taxed differently.
You lose the ability to elect early taxation and will be taxed on the value of your equity as it vests, potentially resulting in higher taxes.
Yes. Investors prefer simplicity and transparency. Complex or founder-heavy structures may deter investment unless clearly justified and carefully limited.
Most states require corporations to specify a par value in their certificate of incorporation, though the exact rules vary.
It could make early equity grants more expensive and limit flexibility in future financings. That’s why startups typically choose a very low number.
To allow founders and employees to receive stock at minimal cost while leaving room for significant increases in value during future fundraising rounds.