Payment For Stock

Joseph W. Bartlett, Special Counsel, McCarter & English LLP, Co-Founder of VCExperts

McCarter & English LLP

2002-08-02

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An atavistic desire to protect creditors explains why state statutes continue to regulate the types of consideration for which corporate stock can be issued. Cash and property are eligible, but promissory notes are questionable ("no" in Massachusetts, "yes" in Delaware), and stock rarely may be issued for future services. The trick, of course, is to designate some form of eligible consideration in the minutes; for example intellectual "property" instead of services.

In the Founders Round, shares are typically issued for nominal consideration, 1 cent per share. The par value stated in the charter being set at 1/10 or 1/100 of one cent. This is an outmoded requirement to protect persons, such as, creditors dealing with the company.

Alternatively, if stock is to be paid in installments and a promissory note is not eligible consideration under state law, it may be possible to work with the concept of assessable stock. Assessable stock is stock issued under the provisions of state law which authorize partly paid stock to be issued, subject to calls for further payments. The fact is that the old line protections stated par value and issuance only for eligible and adequate consideration are no longer of much interest. The stock for services issue now centers on the Internal Revenue Code. If the stocks are issued for services, why is the value not taxable compensation? Percentage interests in an LLC, when issued must also be paid for with a capital contribution representing current value or according to a system entitling the holder to all interest in future profits.