A Series A term sheet changes founder tax planning because it usually puts founder shares back on a vesting schedule. That change creates new taxable events, restarts key holding periods, and forces fresh pricing for employee options. A term sheet is the investor outline of price, control, and payout terms for the round. At Series A, that outline often requires reverse vesting of founder common stock, which means the company can repurchase unvested shares if a founder leaves.
Table of Contents
- Why do founders vest again at Series A?
- Why is the 30-day 83(b) election so urgent?
- How does vesting change the QSBS clock?
- Why can't you reuse the old 409A?
- How does preferred stock shrink founder gain?
Why do founders vest again at Series A?
Investors want founders to stay after the round. Reverse vesting ties continued ownership to continued service. Cooley GO reports that Series A term sheets often impose four-year monthly vesting without a cliff on founder common stock, according to Cooley GO's founder stock guide. For tax purposes, unvested shares are treated as restricted stock.
The founder still holds the shares on day one. The company holds a repurchase right that lapses as shares vest. This matters because each lapse can be a tax event. Without planning, a rising company value turns each vesting month into more taxable income.
Why is the 30-day 83(b) election so urgent?
Founders who receive restricted stock subject to vesting can elect to be taxed at grant value. Cooley explains that the Section 83(b) election must be filed with the IRS within 30 days of grant, as described in Cooley's Section 83(b) guide. The election applies when grant value is still low.
The founder pays tax early on the small spread at issuance. Later vesting then generally produces no additional ordinary income. Miss the deadline and the result reverses. Cooley also explains that each vesting tranche is then taxed as ordinary income at its vesting-date value, with a new capital-gains holding period for each tranche.
How does vesting change the QSBS clock?
Qualified Small Business Stock, or QSBS, allows eligible shareholders to exclude gain after a five-year hold. A timely 83(b) election starts that five-year period at grant rather than at each vesting date. Creative Planning describes that grant-date start for founders and early employees. That early start is valuable because later vesting does not restart the clock.
Founders keep one holding period for the whole grant. Late elections or missed elections can delay exclusion by years. Eligibility remains narrow. Vela Wood lists the core tests in Vela Wood's QSBS primer: For stock acquired after Sept. 27, 2010 and held five years, the exclusion can reach 100% of gain up to the greater of $10M or 10 times basis.
- domestic C-corporation stock acquired at original issue
- $50M or less in gross assets at issuance
- 80% active-business use
- qualified trade or business
- five-year holding period
Why can't you reuse the old 409A?
A signed Series A term sheet generally ends reliance on the prior valuation for stock options. New grants must be priced at or above fresh fair market value. Lowenstein Sandler explains that underpricing can trigger Section 409A 20% tax plus interest and loss of ISO status, according to Lowenstein Sandler's founder pay guide. The issue is timing.
Companies often pause option grants while the round is negotiated. After pricing is clearer, a new 409A valuation sets the new exercise price. Founders should also separate option types. The IRS taxes statutory options and nonstatutory options differently based on income timing at grant, exercise, or sale. Incentive stock options offer deferral only when Section 422 holding and pricing rules are met.
How does preferred stock shrink founder gain?
Series A preferred stock usually has a 1x liquidation preference. Investors receive their investment back before founder common receives anything. Anti-dilution protection can further adjust investor ownership in a down round. That senior claim reduces the founder payout in a modest exit.
If $20M comes in as preferred and the company sells for $22M, little remains for common. The lower common payout also means a smaller taxable gain for founders. The effect is largest in a low or flat exit. High exits still leave value for common after the preference is paid. Founders should model after-preference proceeds, not headline sale price, when estimating tax.