Should I Buy Stock with IP?

When founders of a company buy their initial shares of stock in a newly formed corporation, sometimes they wish to do so by exchanging intellectual property (IP) such as a business plan or a website, or other types of property (the below applies to many types of property, not just intellectual property). Purchasing stock with property raises a number of issues and risks that need to be addressed. This post is intended to help founders evaluate the issues when they buy stock with IP.


In order to buy stock with IP, you’ll need to properly define the scope of the IP that is to be transferred, and make sure that the assignment is perfected. For example, simply noting the founder transfers “the business website” is probably not enough to avoid problems later; you’ll need to transfer the copyright of the content on the website, any licenses related to the content on the website (for example, if you use any themes, or third-party applications), the domain will have to be registered in the Company’s name, and any other such issues.


The valuation of the IP can affect the valuation of the stock. The IRS and auditors will want the fair market value of the company stock to be fairly set for various tax and accounting purposes. Often founders will purchase shares of stock at a very low “par value” price, for example, $.0001 per share, before they assign any assets to the business. But if at the same time they are assigning IP in exchange for the stock, if the IP is later determined to have a much higher value than nominal value at the time, that can affect the assessment of the fair market value of the stock.

For example, if Founder A buys a million shares at $.0001 a share for $100, and Founder B buys a million shares in exchange for a website generating $1000 a month in advertising revenue, the IRS or an auditor could later determine that since Founder B transferred an asset worth significantly more than $100, the supposed fair market value for Founder A’s shares was too low. That could create problems for stock option strike prices, taxes, and audited financials.


In addition to the tax effects of the valuation problem I noted above, exchanging IP for stock is a taxable event unless Section 351 of the Internal Revenue Code applies to the transaction.

If Section 351 does not apply, then the founder will have to pay tax on the difference between the basis in the transferred IP and the fair market value of the stock at the time of the transfer.

In order for  Section 351 to apply, there are two requirements.  First, the founder transferring IP must transfer it solely in exchange for stock.  Second, immediately after the exchange the founder (or founders, if they are all acting together in a single transaction) must own stock possessing at least 80% of the combined voting power of all classes of stock entitled to vote, and at least 80% of the total number of shares of each other class of stock.  If Section 351 applies, a founder transferring IP will not have to pay tax on the exchange, and the basis in the IP will be transferred to the stock.


If you are considering exchanging property for stock, make sure that you:

  • consider the ramifications before you buy stock with IP, as it could have very significant tax consequences;
  • ensure that the property is properly described and assigned, and that the assignment is perfected; and
  • pay at least the par value of the stock in cash, to ensure that the stock is fully paid.