Documenting Founder Stock Purchase Agreements Before Raising Seed Capital
Founder stock purchase agreements convert verbal equity promises into enforceable stock ownership by establishing price, vesting, and tax baselines before seed capital.
par value
Meaning
Accounting conventions require a fixed price to be set for shares at the moment a corporation is formed. The par value is usually set at a tiny fraction of a cent to avoid the risk of selling shares for less than their stated worth. It represents the minimum amount a shareholder must pay to the company for the stock to be considered fully paid.
Minimum Capital
State laws often use this figure to determine the minimum amount of money a company must keep in its accounts to protect creditors. Setting a low par value allows a business to issue millions of shares without requiring a massive initial cash deposit. This figure is recorded on the balance sheet under the common stock line item.
It stays the same even as the company grows and the actual price of a share rises into the hundreds of dollars.
Tax Calculation
Franchise taxes in some jurisdictions are calculated based on the total nominal worth of the authorized shares. A high par value can result in a significant tax bill even for a company with no revenue. Founders often select a value like 0.00001 to minimize this ongoing cost of incorporation.
This choice is a standard part of the early legal setup for a new venture.
Market Variance
Investors ignore the nominal price when they decide how much a company is worth during a funding round. The par value has no relationship to the trading price of a stock on an exchange or the valuation reached in a private sale. It is a legal and accounting artifact rather than a measure of economic performance.