Wondering if anyone has dealt with a similar situation.
I have a small tech startup client that attracted investors and raised $600k selling shares shares at $10 each. That part is straight forward. At the same time they issued more of the same class of shares to individuals and companies that had helped with the startup for no previous compensation for 1/10 of a cent per share. So for example one guy receives 10,000 shares worth $100,000 at current valuation for $10.
So I am thinking we need to show some sort of rollover? Goodwill to the corporation for shares? Or do these individuals need to report something else?
That is what the new investors paid $10/share
This has been in the works for seven years and just now looking like it might go somewhere. Think kinda dragons den shit
So the difference between the original book value of 1/10 cents and market value is booked into paid-in-capital. It is usual for the tech startups to be worthless until they make a breakthrough.
Similar situation, but not a tech start up, just a regular ccpc. Doesnât matter how you look at it, itâs wrong. Not sure how the lawyer would be okay for such transaction.
Using this tech start up as example, as an investor, you invested the money based on the value you see at the time, you got to figure out the FMV of the whole company first, after the FMV per share set at $10, the company issued same share for $1/share, so itâs either a huge discount, or huge over valuation.
What is going on is in lieu of salaries or maybe contract payment the corp will instead give shares. That in itself I donât think is a problem, just how and when should it be reported.
You are actually bang on, that were the exact reasons that I heard why people are doing that, but from a legal perspective, this almost seems like fraud to me. Contingent liabilities, unless they disclosed such arrangement, maybe evasion on the payroll source obligations
The thing is what did the corp get for these shares? I would say more than the $10, ie the waiving of debt that would have been owed to these individuals, although it had never been billed. and therefore income to the recipients? I want to talk to the lawyer that set this up and find out what he was thinking.
I was thinking from the perspective of the investor. I got the valuation based on the financial statement, without the unpaid salaries on the book, only to find out that, whatever invested in the company, didnât account for the unpaid salaries. Let say, $100,000 for 100 shares, for investors, and $1000 for 100 shares for the unpaid employees, the equity just gone down from $100,000 to $50,500 only, thatâs a 50% loss right away there. Should the company booked the expenses, the FMV would only be half,
This situation seems quite similar to being issued stock options as an independent contractor, or in contemplation of becoming a shareholder. Iâm not sure the treatment would be that much different to that of formal stock options.
If a bunch of people that helped the company for no compensation now effectively receive free shares havenât they been able to convert business income into a potential capital gain (possibly even eligible for CGE)?
And as jyliucpa has mentioned; what about the poor shareholders that invested $600,000 for their 60,000 shares which have now been diluted down to virtually nothing with the issuance of tens of thousands of new shares to other people.
Anyway, I think the people who were issued the 1/10 cent shares likely have some subsection 9(1) income for the difference between the actual value of the shares and the amount they paid for them. I know it can be said the company is a worthless start-up but why would the other investors have paid $10 per share? The FMV of the shares are worth what someone is willing to pay for them. Failing that⌠a business valuation would establish the FMV.
I am still confused. Is your issue with the stock appreciation when the company issued shares for the most recent investors? If someone has paid an amount per share in a specific time in a mutual agreement then that is the established market value of the stock. I still donât see anything wrong in the transactions.
Fraud comes into the equation only when the owners/directors of the company misrepresent the product or the breakthrough.
If what you say is the only documentation published, then does the BCSC (British Columbia Securities Commission) [or whatever Province you are in] know what they have done?
Methinks some people may be in a whole lot more serious trouble than they are presently fessing up to if that is the caseâŚ
That is pretty much what I was thinking. Yes similar to stock option, only difference is the shares are issued up front at a discount. I am not representing any of the recipients but is the corporation required to do or file anything?
Interesting. Not sure there is anything offside at all from a tax perspective, and maybe, or maybe not from the original investorsâ (âOIsâ) perspective.
From the perspective of an OI, if the new investors (âNIsâ) performed work and took discounted shares in exchange, the OIs are getting a (potential) boatload of free work which could ultimately show up as âvalueâ for them. In that case, they should be happy for the value - as long as the value is commensurate with the volume of shares issued.
OTOH if the Directors approved a whackload of shares to dilute the OIs value, with no value addedâŚthey may well have transgressed various civil laws such as not acting in the best interest of the company, or providing preferential treatment against a given group of shareholders. There are civil remedies available for both.
But from a tax perspective, they have high value, low PUC shares. Their problem, not yours. Book the shares at sold amount and thatâs it. (Happens on Sec 85 rollovers all the time.)
If the employees had forgone their rights for salary in the first place, and decided to work for nothing, without any expectation of being paid, then that should the end to the topic, but if all the sudden, the company decided to compensate them, that becomes a series of transactions, and we maybe looking at salary deferral arrangement,
If this is as easy as some suggested, without taxable benefit being taxed for the ones getting the discount.
Think of a CCPC with huge retained earnings, $1M, decided to reward people for helps in the past, which there is no documentation, issued shares from treasury to 4 ppl for $1, if you donât see any issue with that from a tax perspective, the company, now, can declare dividend to 5 different shareholders, instead of the original?