How to invite a silent partner into startup with significant equity?

Question

My friend is a highly connected AND very technical salesperson. A year ago he approached me with a radical idea: there is a sea change happening in his industry that will force companies to abandon existing software infrastructure, and he had an idea that addresses this sea change in a way that does not force his customers to make billion dollar reinvestments in their networks and handles with a new suite of software instead.I was working as a consultant and setup a company (using Stripe) and for the last year have been building the software. We are close to having several large banking customers do paid trials.The software works and is radically different than anything else out there, but it fits easily into existing solutions and the sales cycle is not alien.My friend works for another company in the same industry. When he first had this idea, he told them about it, and they declined to act on it. He has this documented, by the way. It would have cannibalized their opportunities as a reseller of technologies that compete with this new offering.I've taken zero investment up to this point. There is also no revenue yet.My questions are:1. He will leave his current employer soon. How do I let him buy into the company and purchase a large equity stake (for very little cash) without drawing the ire of the IRS if there is a later large sale?2. He has some debt, so one thing he would like to do (and I'm 100% on board about) is letting him purchase stock at a very reduced rate now. Then, when we prove the opportunity and several of these banks do paid trials for $50k or so, the company buys back some of the stock from him (at a very different rate). This obviously establishes a very different valuation for the company, and allows him to reduce his personal debt.Are there better ways to do this? If I offered him a position on the team (as a C-level executive), could I grant him a large equity stake (say 25%)?

caseyf7 · Accepted Answer

1. Do consult a lawyer. The state you&rsquo;re in matters and if you&rsquo;re in the Bay Area you should be able to get a lawyer to provide advice at no cost. I would structure their equity as an option grant. You still have a long way to go to make this successful so they should be vesting over the future. You could give them credit for the time since the company was founded.2. This is not a great way to structure this payment. Really you should just pay him a very high commission rate for closing those first few deals so he can cover the debts. Mixing it with a stock transaction will look shady to future investors/regulators. Be upfront with your investors about this and they should understand.

smt88 · Answer

tl;dr Talk to a lawyer. Many startup lawyers will do early structural stuff for free in hopes that you'll continue to use them. You likely need less than $1,000 of legal work regardless. If you can't afford that, you probably can't afford to start a company.
1. There are explicit tax exemptions for this, but you have to file extra forms to take advantage of them. I don't remember the specifics. Talk to a lawyer.
2. If you take investors, this probably won't be possible. Professional VCs are likely going to prevent early cash-outs like this. I think this is less an issue of legality and more one of whether you raise money and how desirable you are. If you're growing explosively, you can get away with a lot more.
> several of these banks do paid trials for $50k or so
I have a lot of direct experience selling to banks. The sales cycle is years, not months. From the time you have start building your product to the time you get your first check is likely to be years. I hope you have a ton of cash. It will take 5x longer than you think.