October 23, 2026
Yes. A Delaware corporation can't give stock away: every share must be issued for consideration the board approves, at a price no lower than par value. At formation the company has no value, so founders buy their shares at par, typically $0.00001 per share, which means 4,000,000 shares cost $40.00, paid by check or wire. People who join later pay the fair market value set by a 409A valuation, or receive stock options and pay the exercise price only when they exercise.
Key takeaways
Under Section 152 of the Delaware General Corporation Law (DGCL), the board may issue stock for cash, any tangible or intangible property, any benefit to the corporation, or a combination of these. Section 153 adds that shares with a par value must be issued for consideration worth at least their par value. In the absence of actual fraud, the board's judgment about what the consideration is worth is conclusive. So the board sets the price, decides what form payment takes, and records both in a written board consent.
What the board can't do is issue shares for nothing. Stock issued without valid consideration, or without board approval, is open to challenge, and investors will find it in diligence. The fix is a ratification under DGCL 204, which is paperwork you don't want to be doing in the middle of a financing.
At formation the company has no revenue, no assets and no product, so its stock is worth almost nothing. The board values it at par, and each founder buys restricted stock, shares subject to vesting, under a restricted stock purchase agreement (RSPA). With a par value of $0.00001 per share, a founder buying 4,000,000 shares pays $40.00. That is the board's valuation at formation, and it's defensible because there is nothing else to value. How many shares each founder buys is a separate decision; see Founder Equity: How To Split Equity Among Co-founders.
Pay with a personal check or a wire into the company's bank account, from the founder to the company, and keep a record. If the company doesn't have a bank account yet, open one first. Cash is the cleanest consideration because nobody can argue about what it was worth.
Contributing property, including code, designs or domain names you created before incorporating, is valid consideration under DGCL 152. But issuing stock for IP alone invites questions: what was it worth, did you actually own all of it, and was it really transferred? The usual pattern is a combination. The founder pays nominal cash for the shares, and the RSPA includes an assignment of the founder's pre-incorporation IP related to the business. The founder also signs a Confidential Information and Invention Assignment Agreement (CIIAA) covering future work. Investors look for both documents. See How Do I Assign IP I Built Before Incorporating? and Who Owns Startup IP?
Delaware law allows stock to be issued for services already performed, because past work is a benefit to the corporation. The problem is tax, not corporate law. Under Section 83 of the Internal Revenue Code, when someone receives property in connection with performing services, the fair market value of that property minus anything they paid for it is compensation income. If the recipient is an employee, the company may also have withholding and payroll tax obligations on that amount.
When a founder pays the full fair market value for the shares, the gap between value and price is zero. When the shares are also subject to vesting, Section 83 would otherwise measure the income as each tranche vests, at whatever the shares are worth then. An 83(b) election tells the IRS to measure it at issuance instead, when value and price are the same. The election must be filed within 30 days of the date the shares are issued, and it can now be filed on paper or online using IRS Form 15620. Talk to a tax advisor about how these rules apply to you. The point for founders is that buying stock at fair market value and filing an 83(b) keeps the mechanics simple, while stock issued for services creates a valuation and withholding question that someone has to answer.
Sweat equity is a description, not a legal category. It usually means someone worked without pay in the expectation of owning part of the company. Until the board approves an issuance, the person signs a purchase agreement or an option grant, and the shares are recorded on the stock ledger, they own nothing. An informal promise of equity in exchange for work is one of the most common sources of founder disputes, and it can also create wage claims if the person is really an employee. If someone is contributing work in exchange for equity, issue the stock or grant the options properly and set pay in writing. See Promising vs Issuing Equity.
Once the company has real value, par is no longer a defensible price. Before the first 409A valuation, the board can still issue restricted stock to early hires at a price it sets in good faith, usually still low, and those hires file their own 83(b) elections. After the first 409A valuation, the independent appraisal of the common stock, new people have two choices.
They can buy restricted stock at the 409A price. That gives them stock and, if they file an 83(b), a capital gains holding period that starts at purchase, but they must write a check for the full price, which grows quickly as the company raises money.
Or they can receive stock options, the right to buy shares later at a fixed exercise price equal to the 409A value on the grant date. They pay nothing at grant and pay the exercise price only when they exercise. US employees typically receive incentive stock options (ISOs) and everyone else receives nonqualified stock options (NSOs). See NSO vs ISO.
Example. A company is formed with 10,000,000 authorized shares and a 1,000,000-share option pool. Two founders each buy 4,000,000 shares of restricted stock at $0.00001 per share and each pays the company $40.00 by check. Each signs an RSPA with an IP assignment and a CIIAA, and each files an 83(b) election within 30 days of issuance. That leaves 1,000,000 authorized shares that are neither issued nor reserved for the pool.
A year later, after the company raises a SAFE round, its first 409A values the common stock at $0.10 per share. A third person joins and is offered 500,000 shares. If she buys restricted stock, she pays 500,000 × $0.10 = $50,000, and files her own 83(b) within 30 days. If she receives options instead, she pays nothing now and $50,000 only if she exercises all 500,000 options, at the $0.10 exercise price. Most people choose options at that point, which is why first hires get restricted stock only until the first 409A.
Yes. Section 152 lets the board accept any tangible or intangible property or any benefit to the corporation, and a promissory note from the buyer can qualify. But notes cause problems. For tax purposes, the note must be full recourse, meaning the buyer is personally liable for repayment. If the only security is the stock itself, the IRS treats the arrangement as an option rather than a purchase, and an 83(b) election wouldn't work as intended. The note should carry interest, and a tax advisor should set the rate.
The Sarbanes-Oxley ban on loans to executives applies only to public companies, so a private startup can lend to its founders. Investors and acquirers still dislike stockholder notes. They show up in diligence, the company has to decide whether to enforce them, and forgiving one is itself a taxable event to work through. If the price is small enough to pay in cash, pay cash.
For more, see RSPA, Restricted Stock, 83(b) Election and 409A Valuation.
If you're setting up founder stock or making your first equity grants, contact us before anyone signs.
