Law & Taxation mentor Chip Morse responds to the following question from an inc.com user: I have finally found the perfect "angel." The "angel" does not have money to invest, only time, energy, and the technical skills we need to develop our software. We are an S corporation able to issue stock. How should we proceed with drafting the documents outlining the expected work and then actually issuing the stock upon completion?
Chip Morse's response: Assuming that the angel you are working with is an eligible S corporation investor under the Internal Revenue Code (that is, a U.S. individual), stock can be issued for service previously rendered under most state corporation statutes. Usually, the fair market value of the shares of stock is considered taxable income to the recipient and deductible to the company just as though the company had paid the angel in cash. However, you must have legal advice on the applicability of the federal and state securities laws, the tax effects, and whether your state of incorporation permits this.
Also, you may want to restrict the angel from selling the stock to a third party, especially a competitor. Thus, you will probably want to consider a right of first refusal and perhaps other restrictions on the stock. Consult a legal professional about these issues and others to help you draft a document that will serve your business's best interests.