Is there a way to issue stock to a new co-founder without serious tax implications after a priced equity round of investment?

Even if you use convertible debt, having raised money in that fashion will still increase the value of the common stock. Pricing the round does not assign a price to the common stock, if the stock you "priced" was preferred. You'll need to have a 409A valuation performed to determine the price of the common stock; which will typically be in the ballpark of 10% of the preferred price (a good reason to use preferred instead even if the preferences are minimal). As suggested, sell the common stock to the co-founder (if affordable), don't give it. I'm curious if the company could loan the money required to buy the stock, using the stock itself as the only recourse collateral. Talk to an accountant+lawyer. You can bring your co-founder on early. The one-year cliff of the vesting schedule on his stock will protect you if it doesn't work out. Don't time it too close before the fundraise, or else that may need to be included into the valuation of the stock. After raising money you almost always need to use Stock Option grants instead. They'll require a 409A valuation as well, so you'll have the opportunity to decide whether the stock is too expensive before choosing restricted stock versus options. If the co-founder gets options, they can always start exercising them early to gain the long term capital gains tax treatment afforded to stock; but I believe they'll still lose out on the qualified small business stock benefits.

The receipt of shares is either taxable upon receipt or upon vesting. See Section 61 of the Internal Revenue Code. If the fmv of the common stock is low, then the stock can be issued without great tax cost. As the price goes up, you have to use options because the tax burden becomes too great. If the fixed price round is a common stock round, and you give your co-founder common stock the value of the ahrea you give will be set by the fixed price round. Issue the shares before you do a fixed price round. Document the value now. Document it as low as possible. Put him/her on vesting.

Aren't we taxed only on income and capital gains?   This doesn't seem to be either of those things...   What's the regulation citation that says that the person who posed the question will be taxed?