Why DDS Founders Fund Requests Penny Warrants Instead of Advisor Shares
When DDS Founders Fund joins an advisor schedule, we ask to receive a penny warrant rather than shares issued directly. Here's why, and what it means for you as a founder.
Why the warrant structure?
As a fund, DDS occupies a different position than an individual advisor. When shares are issued directly in exchange for services, the recipient can face an immediate taxable event — the shares may be treated as compensation, generating ordinary income at the time of issuance based on the fair market value of the stock, which can trigger a 1099 and require a valuation. That's an administrative and tax burden that doesn't serve either party.
A penny warrant, structured correctly, is designed to have minimal current value at issuance, which can help avoid triggering that immediate income recognition. Tax is generally deferred until the warrant is exercised or the underlying shares are sold — and at that point, the gain may be treated as capital gain rather than ordinary income, depending on the facts.
This is specific to DDS's position as a fund vehicle paired with a cash investment. It's not a structure every advisor uses, but it's the right fit for how we're set up.
Quick FAQ for founders
What is a warrant?
A contractual right to purchase shares at a fixed price ($0.01) at a future date. It's functionally the same as an option to buy shares.
Does it affect my cap table now?
It's typically noted on a fully-diluted basis but it's the same impact as having issued shares. The warrant shares aren't outstanding until exercised.
When does DDS exercise?
Usually automatically upon a financing, change of control, or IPO — the same events that create value for any equity holder.
Does DDS pay anything to exercise?
Yes, $0.01 per share — hence "penny" warrant. In practice, this is nominal.
Is this different from what other advisors get?
Yes. This structure is specific to DDS's fund setup. Your other advisors may receive options or shares directly as individuals, which is fine — and doesn't change how you document their arrangements.