As one example, the first Facebook business entity was a Florida LLC. Mark Zuckerberg then created a new Delaware based C-Corp that bought the IP from the LLC.

I believe the original trigger for converting to a C-Corp was the Peter Thiel investment.

If you buy something for less than it's worth, you have to book the difference as income. Not much difference between buying $1000 widget for $1 and buying it for $1000 and then getting paid $999.

No cash is needed to sell the assets or LLC to the C Corp.

Most likely, you would sell the assets of the LLC to the C Corp in exchange for some number of shares (valued at the pre-money valuation of the company) and then issue additional shares equal to the VC money such that the total value of the new C Corp is the post-money valuation.

Afterwards, the founders can distribute the shares and wind up the LLC.

The alternative is for the founders to sell the LLC to the C Corp for shares and then the C Corp can wind up the LLC.

I'm asking out of curiosity (e.g. I have no need to pay a lawyer or CPA to answer this): Would the founders have to potentially, or always, pay taxes on the conversion? Seems like the sale of the LLC or the assets could be recognizable gain.

It seems like it would qualify under the rules of an Other Nontaxable Exchange - Property Exchanged for Stock.[0] I think there are enough cases like this and the IRS rules are sufficiently clear that it will be possible to structure the VC investment in a way that eliminates any tax liability on the conversion.

[0] https://www.irs.gov/publications/p544/ch01.html#en_US_2016_p...

It's easy. Or the C-Corp owns the LLC, or IP assignment. Just move the assets over, not an actual sale.