Introduction

Hank Reiling, one of my favorite professors at HBS, taught his students in his excellent class “Tax Factors in Business Decisions,” that is it best to approach tax law not as simply rules-driven, but to understand the purpose behind the rules. In this case, the goal is clear and noble – to stimulate new investment in startups, and particularly technology startups.

The Qualified Small Business Stock (QSBS) tax rules (IRC Section 1202 and related Section 1045) have significant economic benefits for founders, employees, and venture capital investors. We are encouraging all of our portfolio company founders and CEOs to pay special attention to these rules to make sure they understand them so that they can benefit when eligible and avoid disqualifying foot faults. Continue reading →

Institutional venture capital investors generally prefer to do priced rounds as opposed to investing in convertible notes. Nevertheless, these securities (be they SAFEs or convertible notes) are and will likely continue to be common among early-stage companies. Having been an investor in some of these notes and more often an investor in the first priced round in a company with existing notes, I thought it would be useful to write about how these notes can be treated in your Series A. It is a subject that entrepreneurs sometimes have difficulty with because of a lack of familiarity. The topic is important because the note treatment can change the effective Series A price and have a real impact on founder dilution. Continue reading →