I sold my startup 2 years ago
I knew nothing about personal finance when I set up my business
But at acquisition, I realized there were lots of things I *should* have done from a tax & estate planning perspective
This is what I would do today (aka learn from my mistakes)
👇👇
I knew nothing about personal finance when I set up my business
But at acquisition, I realized there were lots of things I *should* have done from a tax & estate planning perspective
This is what I would do today (aka learn from my mistakes)
👇👇
Some disclaimers before we dive in:
- I am NOT a lawyer, talk to a professional as well
- I did NOT do most of this since I was too late to learn about this
- This is the *short* version but I believe captures 90%+ of what's important
- I am NOT a lawyer, talk to a professional as well
- I did NOT do most of this since I was too late to learn about this
- This is the *short* version but I believe captures 90%+ of what's important
Why am I sharing this?
It's messed up that we don't teach anything about money to people
The more this information is gatekept, the more we propagate existing systems
The tax code is complicated af, and until we can change that, we should democratize access to information
It's messed up that we don't teach anything about money to people
The more this information is gatekept, the more we propagate existing systems
The tax code is complicated af, and until we can change that, we should democratize access to information
Part 1 - Structuring Your Startup
If you build a company for enterprise value (vs cashflow) you should set up a C-Corp
What you want to pay attention to here is QSBS - "Qualified Small Business Stock"
Hold your QSBS stock for 5+ years & you pay no tax on $10M of gains
If you build a company for enterprise value (vs cashflow) you should set up a C-Corp
What you want to pay attention to here is QSBS - "Qualified Small Business Stock"
Hold your QSBS stock for 5+ years & you pay no tax on $10M of gains
The QSBS $10M limit also applies on a per-shareholder basis
This means every single shareholder & investor also gets the same benefit
So instead of owning all equity yourself, you should have your trusts (more soon) & family members all buy shares in your startup and hold
This means every single shareholder & investor also gets the same benefit
So instead of owning all equity yourself, you should have your trusts (more soon) & family members all buy shares in your startup and hold
What if you sell your business before 5 years?
You can perform a QSBS rollover & in 60 days, invest in another qualified small business & keep the clock ticking
Say you hold QSBS stock for 3 years before selling it, you then invest in another biz for 2 years and be eligible
You can perform a QSBS rollover & in 60 days, invest in another qualified small business & keep the clock ticking
Say you hold QSBS stock for 3 years before selling it, you then invest in another biz for 2 years and be eligible
It is 100% worth having your attorney look over the QSBS requirements & making sure:
1 - The business qualifies for all the criteria
2 - You have a clear list of things to look out for so you don't accidentally trip up the QSBS qualification
3 - You "multiply" shareholders
1 - The business qualifies for all the criteria
2 - You have a clear list of things to look out for so you don't accidentally trip up the QSBS qualification
3 - You "multiply" shareholders
QSBS applies on a Federal level, some states also observe QSBS while others don't
I know some people who have moved states to save on QSBS taxes
Personally I think that's a terrible idea, and if you let taxes determine where you live, you're doing life wrong
But... you do you
I know some people who have moved states to save on QSBS taxes
Personally I think that's a terrible idea, and if you let taxes determine where you live, you're doing life wrong
But... you do you
Even if you do not hit the QSBS threshold:
You can have family members (not you or parents) buy shares early on from their self-directed retirement accounts
If they buy from their Roth IRA, the gains are tax-free
Even otherwise, the gains can compound tax-free
You can have family members (not you or parents) buy shares early on from their self-directed retirement accounts
If they buy from their Roth IRA, the gains are tax-free
Even otherwise, the gains can compound tax-free
Sidenote: If you are likely to have multiple business interests, the structure that Alphabet / Berkshire Hathaway employs may be of interest to you
You can apply this strategy to each and every sub-corp separately, with different shareholders
You can apply this strategy to each and every sub-corp separately, with different shareholders
Part 2 - Structuring Your Estate
Your estate is the sum of all you got (assets minus liabilities)
You want to be very thoughtful how you structure this for the sake of all your dependents - the ones you have, and the ones you will have in the future
Your estate is the sum of all you got (assets minus liabilities)
You want to be very thoughtful how you structure this for the sake of all your dependents - the ones you have, and the ones you will have in the future
You will die - or even if you are alive, you will want to share your wealth with your family
And if you have a large estate, your dependents will be taxed heavily on everything they receive unless you plan for this accordingly
Enter a Grantor Retained Annuity Trust, or GRAT
And if you have a large estate, your dependents will be taxed heavily on everything they receive unless you plan for this accordingly
Enter a Grantor Retained Annuity Trust, or GRAT
The way a GRAT works is:
- You move your shares to a GRAT with your dependents as a beneficiary
- The present value of your shares count as a "gift" (subject to gift tax) but all appreciation is transferred without any gift / estate taxes
So you wanna ideally set one up ASAP
- You move your shares to a GRAT with your dependents as a beneficiary
- The present value of your shares count as a "gift" (subject to gift tax) but all appreciation is transferred without any gift / estate taxes
So you wanna ideally set one up ASAP
Best case, you do this when you set up your startup so the entire upside is captured by your dependents
But this can still work as long as it's relatively early in your company journey
Allegedly, Mark Z placed FB shares pre-IPO in a GRAT that have since appreciated ~$50M
But this can still work as long as it's relatively early in your company journey
Allegedly, Mark Z placed FB shares pre-IPO in a GRAT that have since appreciated ~$50M
You can also set up non-grantor trusts for the benefit of your family
You have to appoint a trustee & lose control over the assets, but they serve as a QSBS "multiplier"
The $10M limit applies separately to you and each trust, while protecting the gains from gift & estate taxes
You have to appoint a trustee & lose control over the assets, but they serve as a QSBS "multiplier"
The $10M limit applies separately to you and each trust, while protecting the gains from gift & estate taxes
✅ All done
This is the quick & dirty version of what you should do early on
You can always dive further into the rabbit hole, but there are decreasing marginal returns
And other stuff (i.e. google "DING" etc) starts getting pretty shady and I'd avoid it
This is the quick & dirty version of what you should do early on
You can always dive further into the rabbit hole, but there are decreasing marginal returns
And other stuff (i.e. google "DING" etc) starts getting pretty shady and I'd avoid it
Final note - I wish I did this when setting up my startup, but I'm super happy about how everything turned out
Something I frequently think about:
The people who spend the most amount of time optimizing their taxes tend to be some of the unhappiest people I know...
Something I frequently think about:
The people who spend the most amount of time optimizing their taxes tend to be some of the unhappiest people I know...
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