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.
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: 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.
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. :)
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