Equity for Distribution: What a US or UK Founder Should Check Before Signing

Why this question, and what this is not

We now work with companies in the United States, the United Kingdom and Ireland as well as in Spanish-speaking markets, and founders everywhere ask the same thing: can I pay for distribution work with shares, and what am I agreeing to if I do? The Tier 3 Agreement is one answer. This piece is not about ours; it is about what any US or UK founder should read before signing any version of one.

Two limits. This is general information, not legal or tax advice, and we are not your lawyers or accountants; have a qualified lawyer and accountant in your own jurisdiction review any deal. And the law turns on distinctions: Delaware is not the other 49 states, a corporation is not an LLC, a public company is not a private one, an employee is not a contractor. Ireland has its own company and tax law and is not covered. Where we could not confirm something in a primary source, we say so.

Delaware: can the company issue shares for services?

Start with the statute. Section 152 of the Delaware General Corporation Law lets the board authorize stock for “cash, any tangible or intangible property or any benefit to the corporation, or any combination thereof”. Absent actual fraud, the directors’ judgment of that consideration’s value is conclusive, and the stock is deemed fully paid and nonassessable once the corporation has received the consideration. Section 153 sets a floor for par-value shares: consideration “having a value not less than the par value”.

Read plainly, marketing work can be a “benefit to the corporation,” and the board decides what it is worth. That leaves the practical questions the statute does not answer. Does the board resolution record the benefit and the value placed on it? Is the work already done or only promised, and what happens to the shares if it is never delivered? The contract answers those, which is why the rest of this piece is about vesting and exit. Note too that this is Delaware’s corporation law: another state’s statute, or an LLC agreement, can differ.

US tax: Section 83 and the 30-day election

Under Section 83(a) of the Internal Revenue Code, when property is transferred in connection with the performance of services, its fair market value (less anything paid) is included in the gross income of the person who performed the services, in the first year the rights are transferable or no longer subject to a substantial risk of forfeiture, whichever comes first. For shares that vest over time or against a milestone, the default is therefore tax at vesting, on the value then, in stock the provider may not be able to sell.

Section 83(b) changes the timing. It lets “any person who performs services in connection with which property is transferred” elect to include the value in income for the year of transfer, and the election must be made “not later than 30 days after the date of such transfer”. The wording is not limited to employees, but whether it fits a particular provider is a question for a tax adviser. Under Treasury Regulation §1.83-2, the election is made by a written statement filed with the IRS, a copy goes to the person for whom the services are performed, and it cannot be revoked without the Commissioner’s consent.

Three things follow for a founder, even though the filing is the provider’s:

• The clock runs from the transfer date, so the grant date must be provable: a dated board consent and signed stock agreement are the company’s part.
• The election fixes tax on the value at grant, a number that needs a defensible basis because both sides carry it into their returns.
• Forfeiture does not reverse the tax on its own terms. The regulation treats a forfeiture of electing stock as a sale with a loss equal to the excess, if any, of the amount paid over the amount realized; where nothing was paid, that formula gives no loss to set against income already reported. Whether to elect is a decision for a US tax adviser.

US securities law: who can be paid in stock

Issuing stock is an offer and sale of a security and needs an exemption. The one built for this is SEC Rule 701, which covers non-reporting issuers’ sales under a written compensatory plan or contract to employees, directors, officers, consultants and advisors. Its limits matter for a provider paid in shares:

• Consultants and advisors must be natural persons providing bona fide services, and the services cannot be in connection with a capital-raising transaction. An agency or studio that is a company is not a natural person, so the rule does not cover it on its own terms; another exemption would be needed, which is a question for securities counsel.
• There are volume limits: sales in any 12 months cannot exceed the greatest of $1,000,000, 15% of total assets or 15% of the outstanding class, with extra disclosure above $10 million. State securities laws are a further layer we have not reviewed.

Vesting: tying the equity to a result

Vesting turns “shares for services” from a gift on signature into a payment for what is delivered. The tax code has its own vocabulary: under Section 83(c)(1), rights are subject to a substantial risk of forfeiture if full enjoyment is conditioned on future performance of substantial services. The regulation extends this to a condition related to a purpose of the transfer, if forfeiture is a substantial possibility, and gives the example of property that must be returned if the employer’s total earnings do not increase. Its examples are written around employees, so whether a given outcome condition qualifies for a given provider is for a tax adviser.

The founder’s design question is simpler: what do the shares vest against? Time rewards presence; a measured outcome, defined before signing and read off the same numbers before and after, rewards what you are buying. That is the logic of the Tier scale: a change of state both sides can read. If the outcome cannot be measured, the clause will be argued over at the worst moment.

Delaware supports the machinery. Under Section 202, written transfer restrictions may include a prior right to acquire the shares, an obligation to purchase them, a consent requirement or an obligation to sell; to bind the holder they must be noted conspicuously on the certificate (or in the notice for uncertificated shares) unless the holder has actual knowledge. A buy-back or forfeiture right is something to write down and record, not to rely on goodwill for.

Where a SAFE fits, and where it doesn’t

Y Combinator describes a SAFE as “a short contract an investor signs to fund your startup now in exchange for the right to shares of stock in your startup later”, with ownership sold equal to the investment amount divided by the valuation cap. It is a cash-funding instrument; the page does not address paying service providers, and we found no guidance that does. A SAFE issued for services would depart from the standard form, and any new equity changes the cap table your existing SAFEs convert against. Let a lawyer choose the instrument.

UK: what the Companies Act 2006 says

The UK draws a line the Delaware statute does not. Section 585 is headed “Public companies: must not accept undertaking to do work or perform services”: a public company must not accept, in payment up of its shares or any premium, an undertaking that someone should do work or perform services. A holder whose shares were treated as paid up that way is liable to pay the nominal value plus any premium, and interest on it.

For a private company the rule is in section 582: shares “may be paid up in money or money’s worth (including goodwill and know-how).” Section 585 is written for public companies and has no private-company equivalent, so on the face of the Act a private company is not barred from taking something other than cash. We have not verified how this applies to a specific structure (services already performed, nil-paid shares, options); a UK solicitor should confirm it. If your company is, or will become, public, a promise of future work cannot be the price of shares.

UK tax: employee, contractor, or neither

HMRC’s main regime is employment-related securities (ERS). By section 421B of the Income Tax (Earnings and Pensions) Act 2003, it applies where the right or opportunity to acquire securities is available by reason of an employment of the person acquiring them or of any other person. HMRC’s manual treats this as a factual test and gives an example where an employee has shares delivered to someone else: that person has acquired employment-related securities, and the charge falls on the employee. The consequence is Income Tax and National Insurance contributions on the value accessed as reward, and the employer must file an ERS return by 6 July following the end of the tax year.

Does it reach a supplier who is not an employee? It depends on the facts. A provider who is, or is treated as, an employee is inside the regime, and routing shares through someone else does not by itself take it outside. A genuinely independent supplier connected to no employment is, on the section 421B test, a different case. For an individual trading on their own account, HMRC’s Business Income Manual says the value of trading income received in non-monetary form is taxable in full as trading income, and section 28A of the Income Tax (Trading and Other Income) Act 2005 brings money’s worth into account as a receipt. We have not verified how restricted shares are valued for that purpose, or how a provider that is itself a company is taxed; both are for a UK tax adviser.

The practical point for a founder is status. The more a provider looks like part of your team — embedded, directed, on a fixed schedule — the more the employment rules become a live question with payroll and reporting consequences for your company. A written label does not settle it; the facts do.

The founder’s checklist

Whatever the jurisdiction, and whoever the counterparty is — us included — these decide whether an equity-for-distribution deal is a good one:

1. A measurable outcome. The numbers that decide vesting, the baseline, the date and the data source. If a stranger cannot check it from one sentence, it is not a result.
2. Minority and no control. A partner paid for one layer has no need for a majority, a board seat or day-to-day authority. Check what rights attach to the class of stock.
3. One owner of the result. If an agency or another partner is paid for the same work, nobody can say whose effort moved the number.
4. An exit and buy-back clause. What happens to shares that never vest, to vested shares if the relationship ends, and to both on a sale of the company, recorded so that it binds.
5. No promise you cannot keep. A guaranteed ranking or citation count is not a result anyone controls; define a measurable change instead.
6. Tax ownership and dates. In writing: who handles the US 83(b) election and by when, or the UK status analysis and any reporting.
7. The instrument and the cap table. Stock, restricted stock, options or something else, and how it sits with any SAFEs, convertibles or option pool.
8. A lawyer and an accountant in your jurisdiction. Not ours, and not the counterparty’s. Bring the draft, your cap table and the outcome you would vest against, and ask: is the issue valid, which securities exemption applies, who bears which tax event, does the vesting condition work, and what must be filed and by when?

The Tier 3 Agreement is built on these principles: shares earned only when the company moves up the Tier scale on a measurement agreed at signing, with no controlling stake and no hand on daily operations. We publish who we turn down in who we don’t partner with, and the economics of trading ownership for work are in venture studio economics. None of it replaces your own counsel, and a deal that does not survive your lawyer’s careful reading is one neither side should want.