Nothing is more valuable to a founder than the equity in his or her company. The initial allocation of stock among the founding team can be one of the founder’s toughest decisions because it can have lasting consequences for everyone involved. Professor Noam Wasserman in his classic book, The Founder’s Dilemmas, ranks this third among the most difficult challenges facing a founding team, after establishing their relative relationships, and articulating their roles in the startup.

Wasserman also reviews the reasons why a founder might want to wait to make the equity split until later in the development process. For example, the founder may learn more about his or her co-founders’ potential to contribute to the success of the startup by postponing the equity split until after they have worked together for a while. He also mentions (in a footnote) that “There are also tax consequences to waiting” but, this mention grossly understates the actual risk waiting poses to founders.

Get Stock into Your Founding Team’s Hands at the Earliest Possible Date

The core mission of any startup is to create value for its founders and other stakeholders through the development and commercialization of new products and/or services. Every day that a founding team drives towards that goal, they are increasing the value of the startup’s stock. In order to capture that increase in value for your founding team, you’ll want to get stock into their hands at the earliest possible date. And that means more than just a handshake on the stock split. The actual stock should be issued in their names and paid in full.

For tax and liquidity purposes, it is crucial to establish the exact date and price of the founders’ stock purchases. Founders often assume that they have the right to purchase their company’s stock for pennies at any time and hold it until a liquidity event (IPO or M&A) and then only pay tax when they cash out. Under tax principles, however, if you pay one cent for a share of your company’s stock when it is worth a dollar, you owe tax on $.99 of “phantom income” even though you received no cash payment. That would be a tax disaster. Similarly when it comes time to sell your stock, it would be a disaster if you cannot prove when you purchased it (i.e., establish your holding period). That may delay when you can sell.

Establish Vesting Schedules

If you are a founder, you may feel stuck on the horns of an equity-allocation dilemma. You may have concerns about how much each of the members of your founding team will contribute to the success of your startup. If so, the answer is to spend some time focused on appropriate vesting provisions. Vesting will ensure that your co-founders will keep their stock only if they actually stay and contribute.

No matter what you do, do not delay the initial stock issuances, and thereby risk serious tax and liquidity issues for everyone down the road. Establishing stock grants early on and up front will save not only money, but unnecessary internal turmoil down the line.