Founder’s days sells the company, its valuation takes center stage. However, too much focus on valuation often fails to fully consider the taxes that shareholders and other stakeholders will pay after the sale.
Some founders pay 0% tax after exit, while others pay 50% or more of the sale proceeds. Some founders make twice as much money as other founders for the same selling price. This is purely due to circumstances and tax planning. Personal tax planning can ultimately affect a founder’s take-home earnings as much as changes in exit-level valuations.
how does this happen? The taxes you pay will ultimately depend on the type of shares you own, how long you have held them, where your shareholders reside, potential future tax rate changes, and your tax planning strategy. If you’re thinking about taxes right now, chances are you’re ahead of the game.
This article provides a quick overview of how founders can think about taxes and how to easily estimate the taxes you’ll have to pay when selling your company. It also touches on advanced tax planning and optimization strategies, state taxes and future tax risks. Of course, please remember that this is not tax advice. You should consult a certified public accountant or tax advisor before making any tax decisions.
How to tax shareholders
When it comes to minimizing capital gains taxes, QSBS (Qualified Small Business Stocks) could be a game changer for those who qualify.
Let’s assume you’re a founder and own stock or options in a typical venture-backed C corporation. Whether you are taxed at the short-term capital gains (regular income tax rate) or at the long-term capital gains, also known as the Qualified Small Business Stock (QSBS) rate, depends on many factors. Understanding the differences and where you can optimize is essential.
Below is a table that summarizes the different types of taxation and when each applies. Where applicable, we break this down further to show “everything” combined federal + state + city tax.
Founders with imminent exits raising $10 million or more: Advanced tax strategy I covered it in one of my previous articles because there is an opportunity to multiply or “stack” the $10 million QSBS exclusion to further minimize taxation.
As noted above, common means of influencing the taxes a founder must pay post-exit include QSBS, trust establishment, state of residence, length of time holding shares, whether to exercise options, etc. I have.