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Say you sold a VC backed startup for 1B with an equity stake of 5%, How much actual cash vs stock does a founder get from selling/exiting a start-up?

Vanessa Kruze, CPA, is a leading expert in startup taxes and tax compliance. Her team at Kruze Consulting has filed thousands of tax returns for companies that have raised billions in VC funding, and her work has been diligenced by leading VCs, attorneys, and M&A teams at the largest technology companies.
Vanessa Kruze, a highly-experienced CPA, brings valuable tax expertise to startups, drawing from her rich background at Deloitte Tax and as a financial controller for a $20 million startup. As the leader of Kruze Consulting, recognized multiple times in the Inc 5000 list, she specializes in navigating the complex tax landscape for startups. Her firm is known for delivering precise and strategic tax solutions, delivering tax credits utilizing advanced tools to ensure compliance and optimize tax benefits for startups throughout the United States.

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Let’s assume you have 5% of the billion-dollar exit and VC liquidation preferences are much lower than $1 billion so that it’s in the VCs’ best interest to give up the liquidation preferences and convert to common stock like the founder. The Founder will then receive 5% of the purchase price. You will take home $50 million in proceeds before taxes.

Read to the end for one tax tip that can help you take home a LOT more of your earnings at an exit.

In terms of the cash equity mix it will depend on the deal terms, your personal tax preferences, and how motivated the acquirers are trying to keep you.

Deal Terms Impact

Deal terms: In the old days before all the tech on companies had huge amounts of cash, most acquisitions were done via stock. However now that Google, Microsoft, Facebook, Apple and etc. have huge cash piles, they actually prefer to use cash. Why? Because cash is less dilutive. They don’t have to issue more shares. Investors like this and it makes the accretion / dilution analysis for the deal much more friendly. If the $ billion target company is even slightly profitable, it’s likely the deal will be accretive.

The stock and equity mix is very fluid and it’s negotiated in every deal. When you get into the billion-dollar exit stratosphere you’re really trying to drive the highest purchase price possible and often times the targets let the acquirers dictate the cash equity mix. The VCs are often backed by large pension funds and institutions that are tax-exempt. These investors don’t care too much about cash versus stock. That assumes that the acquirer has a liquid stock.

How Much Do Founders Make in an Acquisition - Tax Influences

Founders Personal Tax Preferences: The founder does care about tax consequences. If the founder believes in the acquirer, she will want to minimize their own personal taxes by taking a lot of stock.

For the merger to not be taxable immediately there has to be a heavy stock component in the deal. That % of stock consideration varies but the baseline is over 50%. If there is a significant amount of stock in the deal the IRS will classify it as a reorganization and not an acquisition. No taxes are paid on the stock portion of the purchase price at the time of acquisition.

However when the Founder starts to sell stock for cash, taxes become due. Delaying selling will defer the taxes indefinitely. In a sense the founder is in control of her own tax destiny.

Acquirers Desire to Keep the Founder Involved: The final variable is how much the acquirer wants to keep the founder involved in the company going forward. The acquirer may demand that the entrepreneur have a heavy stock component going forward so that they are very motivated to make the new company successful. This would be negotiated in the merger acquisition agreement. Often times founders get an additional chunk of stock that vests over two - four years in the acquisition.

This is a complement of sorts and is a testament to the founders strength and ability to get the company even farther after the billion-dollar exit. However if the founder is trying to cash out as fast as possible it’s not a great situation. If you’re selling a company for 1B+, plan on sticking around for a while.

After Tax Take Home Amount: Building a $1B+ company is really hard and takes a long time. Assuming you did an 83B Filing and have exercised all your options a long time ago, you will qualify for Long Term Capital Gains on your $50M in proceeds. Your tax rate will be between 15% - 20%. Assuming you are in the higher bracket, you will pay $10M of your $50M to the Federal government. You’ll have a state tax bill too but that varies.

I would plan on taking home $35M - $40M post acquisition. Have fun with the money and do some good in the world too. :)

One Tax Tip That Helps Founders Make More at An Acquisition

When navigating the complexities of a successful startup exit, particularly one that involves significant financial gains, it’s crucial for founders to be aware of tax strategies that can maximize their earnings. One such strategy is the Qualified Small Business Stock (QSBS) tax exemption. Read our article on QSBS; we’ve got a summary of it below. But this is a complicated tax strategy that may trigger an audit by the IRS, so it’s best that you work with a qualified tax professional early in your startup’s life to make sure you are meeting all of it’s complex requirements and producing adequate documentation to back up your position. This is an advanced tactic that can increase the amount founders make at an exit.

Understanding QSBS

QSBS refers to a tax benefit outlined in Section 1202 of the Internal Revenue Code. It offers substantial tax relief for investors and founders of qualifying small businesses. Here’s a breakdown of its key features:

Eligibility Criteria: The stock must be in a C-corporation with assets of $50 million or less at the time of issuance and must be held for at least five years. The corporation must also engage in a qualified trade or business.

Tax Exemption Benefits: QSBS allows for an exemption of up to 100% on capital gains from the sale of qualified stock, capped at $10 million or 10 times the adjusted basis of the stock.

Impact on Founders: For founders, this could mean significant tax savings. In the scenario described earlier, where you anticipate $50 million in proceeds, leveraging QSBS could potentially shield a substantial portion of this amount from capital gains tax.


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