Toolkit · Business

The Startup Formation and Financing Toolkit

26 U.S.C. § 83

Type
Toolkit
Jurisdiction
National
Date
2026-06-25
Topic
Business

This toolkit supplies the documents and worksheets a founder actually needs. It opens with the two artifacts that prevent the most expensive failures: the thirty-day election letter and the intellectual property assignment covering pre-incorporation work. It provides a fully diluted cap table model, a SAFE conversion worksheet, and a term sheet scorecard that ranks provisions by what they are worth. It includes board consent skeletons, an option grant checklist keyed to valuation requirements, a data room index, and a closing and post-closing checklist. It supplies a founder agreement outline covering deadlock and departure, and an exit waterfall worksheet. Each tool names the failure it prevents.

The Startup Formation and Financing Toolkit

Business > Startups and Venture Financing | Published 25 June 2026 - Updated 8 August 2026 | UpLaw - uplaw.us

How to Use This

Two documents prevent most of the expensive failures in early-stage practice, and both are produced in week one: Tool 1, the election under 26 U.S.C. § 83, and Tool 2, the intellectual property assignment. Everything else is optimization.

⚠️ Tool 1 has a thirty-day deadline with no extension and no relief.

Tool 1 — Section 83(b) Election Letter

File within thirty days of the stock transfer. Send by certified mail with return receipt, keep the receipt permanently, and give a copy to the company.

ELECTION UNDER SECTION 83(b) OF THE INTERNAL REVENUE CODE

The undersigned taxpayer hereby elects, pursuant to 26 U.S.C. § 83(b), to include in gross income for the current taxable year the excess, if any, of the fair market value of the property described below at the time of transfer over the amount paid for such property.

1. Taxpayer. Name; address; taxpayer identification number; taxable year for which the election is made.

2. Description of property. [Number] shares of common stock of [Company], a [state] corporation.

3. Date of transfer. [Date]. Taxable year: [year].

4. Nature of the restrictions. The shares are subject to vesting over [four] years, with a [one]-year cliff, and are subject to repurchase by the Company at the original purchase price upon termination of the taxpayer's service relationship, which restrictions lapse over time.

5. Fair market value. $[amount] per share at the time of transfer, determined without regard to any restriction other than a restriction which by its terms will never lapse. Aggregate: $[amount].

6. Amount paid. $[amount] per share. Aggregate: $[amount].

7. Amount to include in gross income. $[difference].

The undersigned has furnished a copy of this election to [Company].

Date: __________ Signature: __________

Filing checklist.

  • [ ] Mailed within 30 days of the transfer date — count from the date the stock was transferred, not the date documents were signed.
  • [ ] Certified mail, return receipt requested. Keep the receipt permanently — it is the only proof.
  • [ ] Copy delivered to the company and filed in the diligence folder.
  • [ ] Copy retained with the taxpayer's records.
  • [ ] Repeat for every subsequent issuance of restricted stock, including early-exercised options.

Failure it prevents. Taxation at each vesting date on then-current value, on shares that cannot be sold — a bill that can exceed a founder's total compensation for years.

Tool 2 — Founder Intellectual Property Assignment

CONFIDENTIAL INFORMATION AND INVENTION ASSIGNMENT AGREEMENT

1. Assignment of prior work. Founder hereby irrevocably assigns to the Company all right, title, and interest in and to all inventions, works of authorship, designs, source code, data, know-how, and other intellectual property conceived, developed, or reduced to practice by Founder before the date of this Agreement that relate to the Company's actual or anticipated business, research, or development, including without limitation [describe the pre-incorporation work specifically].

2. Assignment of future work. Founder assigns to the Company all such intellectual property created during the period of Founder's service.

3. Prior inventions excluded. Attached as Exhibit A is a list of inventions Founder claims to own and excludes from this Agreement. If Exhibit A is blank, Founder represents there are none.

4. Third-party rights. Founder represents that the assigned property does not infringe any third party's rights and that Founder is not subject to any agreement with a prior employer or other party that conflicts with this Agreement. Founder has attached copies of any such agreements as Exhibit B.

5. Further assurances. Founder will execute documents and take actions reasonably requested to perfect and enforce the Company's rights, and appoints the Company as attorney-in-fact for that limited purpose.

6. Confidentiality; non-solicitation. [Terms.]

7. Moral rights waiver to the extent permitted by law.

Checklist.

  • [ ] Signed by every founder, including the one who "obviously" owns nothing.
  • [ ] Exhibit A completed, even if blank, and initialed.
  • [ ] Prior employment agreements actually read and attached as Exhibit B where relevant.
  • [ ] Equivalent agreements signed by every employee and every contractor, including designers and short-term freelancers.
  • [ ] Domains, repositories, cloud accounts, and app store accounts transferred into the company's name.

Failure it prevents. The most common diligence stopper in the field: a company that does not own its own product.

Tool 3 — Fully Diluted Cap Table Model

Holder Security Shares / $ invested Cap or price Conversion shares % before round % after round
Founder A common (vested) Common
Founder A common (unvested) Common
Founder B common Common
Issued options Option
Unissued pool Reserve
SAFE 1 SAFE
SAFE 2 SAFE
Note 1 (incl. accrued interest) Note
Series Seed preferred Preferred
New round Preferred
Total 100% 100%

Validation checks.

  • [ ] Total equals 100% fully diluted.
  • [ ] Each SAFE converts at its own cap, not at the round price.
  • [ ] Post-money SAFEs are modeled so that later instruments dilute founders, not earlier SAFE holders.
  • [ ] Option pool expansion applied pre-money.
  • [ ] Note interest accrued to the expected closing date.
  • [ ] Most favored nation adjustments applied.
  • [ ] Warrants included.

Exit columns to add. For each holder, proceeds at exits of $10M, $30M, $100M, and $300M, run through the waterfall in Tool 9.

Tool 4 — SAFE / Note Decision Worksheet

Complete before signing each instrument.

Question Answer Why it matters
Instrument type SAFE / Note Notes carry maturity and repayment risk
Pre-money or post-money Post-money shifts later dilution onto founders
Amount
Valuation cap Determines actual dilution
Discount Applies if better than the cap
Interest rate (notes) Increases conversion shares
Maturity date (notes) Repayment demand risk if a round slips
Qualified financing threshold Controls when conversion occurs
Most favored nation clause Later better terms flow backward
Pro rata side letter Can crowd out a future lead's allocation
Board or information rights Unusual at this stage; resist
Modeled ownership after conversion Run at a realistic next-round price
Cumulative SAFE ownership to date The number founders miss

Rule. If the cumulative modeled conversion exceeds what the founders would accept in a priced round, stop raising on instruments and price the round.

Tool 5 — Term Sheet Scorecard

Score each provision. Anything marked red is worth trading valuation to fix.

Provision Green Yellow Red This deal
Liquidation preference 1x non-participating 1x participating w/ cap Participating uncapped, or >1x
Anti-dilution Broad-based weighted average Narrow-based Full ratchet
Dividends Non-cumulative Cumulative, low rate Cumulative, high rate, compounding
Option pool Sized to plan, post-money Sized to plan, pre-money Oversized, pre-money
Board Founder majority or balanced Investor-appointed independent Investor control
Protective provisions Standard corporate actions Adds budget approval Hiring, ordinary debt, licensing
Drag-along Requires common approval too Preferred plus board Preferred alone
Founder vesting Credit for time served Partial credit Full restart
Pro rata rights Major investors only All preferred All holders incl. SAFEs
Redemption rights None Long-dated, board discretion Investor put right
No-shop ≤45 days, terminable 60 days Long, with expense reimbursement on failure

⭐ Negotiate in the order of this table, not in order of the numbers. Valuation is the last row for a reason.

Tool 6 — Board Consent Skeletons

Formation consent.

RESOLVED, that the Certificate of Incorporation filed on [date] is ratified; that the Bylaws attached as Exhibit A are adopted; that [names] are appointed as officers with the authority set forth in the Bylaws; that the Company open accounts at [bank] and that [name] is authorized to act thereon; that the Company's fiscal year shall end [date]; and that the officers are authorized to make all filings and registrations necessary to qualify the Company to do business.

Founder stock issuance consent.

RESOLVED, that the Company issue [number] shares of Common Stock to [name] at $[price] per share pursuant to the Restricted Stock Purchase Agreement attached as Exhibit A, subject to the vesting and repurchase provisions therein; that the Board determines the fair market value of the Common Stock to be $[amount] per share as of the date hereof; and that the officers are authorized to execute and deliver the agreement and to record the issuance in the Company's stock ledger.

Equity plan and grant consent.

RESOLVED, that the [Year] Equity Incentive Plan attached as Exhibit A is adopted and [number] shares are reserved thereunder, subject to stockholder approval; that the Board, having reviewed the independent valuation dated [date] prepared in accordance with 26 U.S.C. § 409A, determines the fair market value of the Common Stock to be $[amount] per share; and that the options listed on Exhibit B are granted at that exercise price on the terms stated.

Financing consent.

RESOLVED, that the Company sell [number] shares of Series [ ] Preferred Stock at $[price] per share pursuant to the Stock Purchase Agreement attached; that the Amended and Restated Certificate of Incorporation attached is approved and recommended to stockholders; that the ancillary agreements attached are approved; that the Board has determined the offering is exempt from registration pursuant to 17 C.F.R. part 230 and directs the filing of all required federal and state notices; and that the officers are authorized to take all actions necessary to consummate the transaction.

Minutes discipline. Record deliberation, alternatives considered, and any conflicts disclosed — not only the resolutions.

Tool 7 — Option Grant Checklist

Run for every grant. No exceptions.

  • [ ] Plan adopted and pool reserved, with stockholder approval where required.
  • [ ] Current valuation on file supporting the exercise price under 26 U.S.C. § 409A. Confirm the date — after each financing, after material events, at least annually.
  • [ ] Exercise price at or above fair market value.
  • [ ] Option type determined: incentive stock options under 26 U.S.C. § 422 with the related rules at 26 U.S.C. § 421 — employees only, annual limitation checked — or nonqualified.
  • [ ] Vesting schedule stated, with commencement date.
  • [ ] Board approval, with the grantee listed individually in the consent.
  • [ ] Grant documents delivered and acceptance tracked.
  • [ ] Post-termination exercise window stated, and its effect on option type understood.
  • [ ] Early exercise permitted? If so, the grantee is told about the thirty-day election under 26 U.S.C. § 83 in writing.
  • [ ] Cap table and ledger updated.
  • [ ] Securities exemption for the grant confirmed.

⚠️ Never grant against a stale valuation. The consequence falls on the employee, not the company, which is precisely why it is unforgivable.

Tool 8 — Closing and Post-Closing Checklist

Closing.

  • [ ] Board approval of the financing, charter, and pool increase.
  • [ ] Stockholder approval of the charter amendment; notice delivered to non-consenting holders.
  • [ ] Preferred consent obtained where prior protective provisions apply.
  • [ ] Disclosure schedules accurate and complete.
  • [ ] Charter filed and confirmation received.
  • [ ] Signature pages released against the closing conditions.
  • [ ] Funds received and confirmed.
  • [ ] Stock issued; ledger updated the same day.

Post-closing — the week everyone skips.

  • [ ] Federal notice filing within the required period under 17 C.F.R. part 230; registration requirement at 15 U.S.C. § 77e, exemptions at 15 U.S.C. § 77d, state coordination under 15 U.S.C. § 77r.
  • [ ] State notice filings and fees.
  • [ ] Cap table reconciled to closing documents.
  • [ ] New director seated; first post-closing meeting scheduled.
  • [ ] New valuation obtained before the next option grant.
  • [ ] Information rights calendar established.
  • [ ] Insurance updated.
  • [ ] Diligence file updated with everything from the round.
  • [ ] Record holder count checked against 15 U.S.C. § 78l.

Tool 9 — Exit Waterfall Worksheet

Step Amount Notes
Gross purchase price
Less: debt repayment Venture debt sits ahead of everyone
Less: transaction expenses Bankers, counsel, accountants
Less: escrow / holdback Typically 10–15%, released in 12–24 months
Less: retention and transaction bonuses Off the top, before the waterfall
Distributable proceeds
Series [latest] preference Charter order — often last-in, first-out
Series [earlier] preference
Participation (if any) Preference plus pro rata
Remaining to common
Founder A
Founder B
Option holders (net of exercise price)

Analyses to run alongside.

  • [ ] Does the preferred convert (pro rata exceeds preference) at this price? Model both.
  • [ ] 26 U.S.C. § 280G parachute analysis, and the private company cleansing vote before closing.
  • [ ] 26 U.S.C. § 1202 five-year holding period, per holder, per issuance date.
  • [ ] 26 U.S.C. § 368 structure if tax-free treatment is available.
  • [ ] Unvested equity treatment under the plan's change-of-control provisions.
  • [ ] Appraisal rights notice requirements.
  • [ ] Drag-along mechanics and required notices.

Tool 10 — Founder Agreement Outline

The conversation nobody wants and everybody needs, held while the founders still agree about everything.

1. Roles and titles. Who decides what, day to day. 2. Time commitment. Full time from when; what outside activities are permitted. 3. Equity. Split, vesting schedule, cliff, acceleration, and repurchase mechanics. 4. Compensation. Salary when funded; expense policy; no unilateral changes. 5. Decisions requiring unanimity. Raising money, selling the company, incurring debt above $[X], hiring executives, changing the equity split. 6. Deadlock. [Tiebreaking independent director / buy-sell at a formula price / shotgun provision]. Choose one and write it down. 7. Departure. Voluntary, involuntary with cause, involuntary without cause — and the equity consequence of each, with "cause" defined narrowly and specifically. 8. Intellectual property. Reaffirms the assignment; addresses outside projects. 9. Confidentiality and non-solicitation. 10. Dispute resolution. Mediation, then arbitration, with a seat and rules named.

⚠️ Define "cause" precisely. A vague definition invites litigation exactly when the company can least afford it.

Tool 11 — Data Room Index

1. Corporate — charter and amendments; bylaws; good standing; foreign qualifications; complete board and stockholder consents and minutes; officer appointments. 2. Equity — stock ledger; fully diluted cap table; founder purchase agreements; every election with proof of filing; plan documents; every grant with board approval; every valuation; SAFEs, notes, warrants, side letters; prior round documents. 3. Securities — exemption analysis per round; federal and state notice filings; accreditation questionnaires and verification; subscription documents. 4. Intellectual property — assignments from every founder, employee, and contractor; trademark and patent filings; domains; open source inventory; inbound licenses. 5. Contracts — customer and vendor agreements; forms; leases; anything with change-of-control, exclusivity, or most favored nation terms. 6. Employment — offer letters; contractor agreements and classification analysis; handbook; separation agreements. 7. Financial and tax — statements; returns; franchise tax receipts; payroll registrations. 8. Other — insurance; litigation and demands; privacy policies and data map; regulatory licenses.

⚠️ Two folders decide most diligence outcomes: intellectual property assignments, and a stock ledger that reconciles.

Tool 12 — Annual Compliance Calendar

When Item Owner
Q1 Franchise tax and annual report, all jurisdictions
Q1 Board meeting; approve prior year minutes
Q1 Insurance renewal review
Q2 Valuation refresh under 26 U.S.C. § 409A
Q2 Cap table reconciliation to signed documents
Q2 Board meeting
Q3 Equity plan pool adequacy against the hiring plan
Q3 Diligence file audit
Q3 Board meeting
Q4 Intellectual property audit: assignments, filings, open source
Q4 Contract review for change-of-control provisions
Q4 Board meeting; budget approval
Ongoing Information rights deliveries
Ongoing Repurchase notices on any departure
Ongoing Securities notice filings after any issuance
Ongoing Record holder count against 15 U.S.C. § 78l

Tool 13 — Departure Processing Sheet

  • [ ] Departure date recorded; last day of service confirmed in writing.
  • [ ] Vested and unvested share counts computed as of that date.
  • [ ] Repurchase notice sent within the contractual window. Calendar the deadline the day the departure is known.
  • [ ] Repurchase price paid; cancellation recorded in the ledger.
  • [ ] Option post-termination exercise window communicated in writing, with the expiration date stated.
  • [ ] Separation agreement: equity treatment confirmed; intellectual property assignment reaffirmed; confidentiality and non-disparagement addressed.
  • [ ] Company property, accounts, credentials, and devices collected.
  • [ ] Board seat resignation obtained if applicable.
  • [ ] Cap table updated; investors notified per information rights.
  • [ ] Cause determination documented if asserted, against the contractual definition.

⚠️ The repurchase notice is the entire point of this sheet. A right that lapses is a permanent transfer of ownership to someone who left.

Tool 14 — Quick Reference

Do Never
File the election within 30 days, certified mail Assume it can go with the tax return
Vest founder shares from day one Add vesting when an investor demands it
Get assignments covering pre-incorporation work Assume paying someone transfers ownership
Model every SAFE before signing Call a SAFE "non-dilutive"
Negotiate liquidation preference before valuation Trade structure for a headline number
Obtain a valuation before every grant Grant against a stale valuation
File federal and state notices after each round Discover the omission in diligence
Send repurchase notices on time Let the window lapse
Keep minutes that record deliberation Paper only the resolutions
Maintain the diligence file continuously Assemble it under a no-shop clock

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