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Once I was sitting with a founder in the hospital on his deathbed. I asked him what his one regret was. He leaned in close and whispered to me, “I wish I had taken advantage of QSBS.” Kidding. This didn’t happen. But I’ll explain to you why a founder might say that. Qualified Small Business Stock (QSBS) allows original shareholders to sell their shares and pay ZERO tax on the first $10 million of capital gains. In order to qualify: 👉 The entity must be a C-Corp at the time of issuance. 👉 The shareholder must be an individual or pass-through entity. 👉 The stock can’t be a secondary sale, only initial issuance. 👉 The stock must be held for at least 5 years. 👉 At least 80% of the company’s assets must be used for the conduct of the business during the hold period (basically it can’t be an investment company.) 👉 It has to be a certain type of business—most startups would qualify. But service businesses where the primary asset is the reputation or skill of the employees are excluded. Sorry consultants! Assuming you qualify, you can deduct 100% of capital gains on all QSBS up to $10 MM (or 10X the adjusted basis of the stock, whichever is greater.) For most startups it’s a no brainer. The downside people mention most often with a C-Corp is double taxation on profits. But for companies that aren’t planning to be profitable—because they reinvest everything into growth—and are optimizing for valuation gains, it really is an incredible deal. But compliance is taken very seriously. If you don’t set it up properly or you make certain missteps (like, you can’t buy back your stock in the wrong ways), you risk losing the exemption—which could cost you millions. Working with proper counsel ( 👋 hi there!) to make sure you get it right is paramount.

H... like Hurdle Shares    A popular instrument especially in the venture world, hurdle shares allow participation in value increases above a defined threshold.   Imagine your startup is valued at €10 million today, and a key employee acquires hurdle shares representing 1.5% of any value added above that🌱. Technically, there will be a negative liquidation preference on these shares, deducting the current value (€10m) before allocating any proceeds to hurdle shares in the waterfall. If the company grows to a valuation of let's say €50m, the key employee will benefit from 1.5% of the value added. Upon a triggering event respectively sale of shares, she would receive €600k (1.5% x (€50m - €10m))💰.  On the other hand, if the value remained at €10m or fell below, she would not receive anything for her hurdle shares.   That payout profile can create a more attractive buy-in setup while at the same time allowing for capital gains taxation if structured properly. In practice, calibration and implementation efforts need to be carefully weighed against the attractive participation opportunity that hurdle shares can be. Please reach out if you want to know more. I am curious to learn about your view and experience with hurdle shares! PS: They are also called #GrowthShares or sometimes #ZeroShares. #HurdleShares #EquityPlans #TaxAdviser #EYGlobalEquityGlossar #GlobalEquity@EY -- Disclaimer --  This post reflects personal views and general knowledge. It's neither meant as advice nor a professional opinion. Given that everyone's situation is unique, consider seeking personalized advice tailored to your circumstances.

Hi fellow founders! Here's a tip from the best Fabio-themed startup finance page out there, OnlyCFO: If you have the means, exercise your stock options early! and read up on QSBS. Better yet, find a professional to help you with this! (Message me for recommendations if you don't have someone in mind.) The entire article ( https://lnkd.in/eaccXw89 ) is worth your time, and I get a lot of value out of the Substack subscription. There are a lot of things to keep tabs on in the world of startup finance and a little planning for success could mean a better outcome when it arrives.

❓ Did you have a company in 2023? ⁉ Was it a Delaware company? Your next deadline isn't April 15th its earlier. If you have a Delaware company you need to file a Delaware Franchise Tax return by March 1st 2024 (note the website will be crazy on the 1st) ⚠ But I didn't make any money last year what is the harm if I am late? 💸 Delaware will penalize you $200 plus interest even if you are a day late. Don't pull your hair or loose sleep over it, Feel free to reach out to us and we can help you with all of your tax and accounting needs. #TaxComplaince #Founders #Startups Y Combinator

LLCs are better than S-Corps for 99/100 startups. Lawyers, VCs, founders - convince me I am wrong. Here are 5 reasons why I think so: 1️⃣ Flexibility in Ownership: With an LLC, I can give anyone ownership interests for any reason. With S-Corps, ownership is based purely on invested capital. This means a founding team can bring other things - namely sweat, or actual work - to the table in exchange for equity. S-Corps are based on cash, and require an option program to give shares to value-added people. Moreover, S-Corps have limitations on the number and type of shareholders they can have. LLCs don't have such restrictions. 2️⃣ Flexibility in Management: LLCs offer more flexibility in terms of how the business is managed and operated. There's no requirement for a board of directors or annual meetings, making decision-making more streamlined. The Operating Agreement acts like the Constitution for the entity - providing governance on decisions. And like the American Constitution, it can be changed as needed! 3️⃣ Losses Flow To Founders: Founders can personally write off losses in an LLC as those losses flow to member holders. With S-Corps, it's taxed at the company level. Now, the same is true for the opposite - profit flows to LLC owners and thus they get taxed, but by the time a startup shows a profit, they can switch how they are taxed (ie: point #5 below). 4️⃣ Profit Distribution Freedom: Unlike S-Corps, which must distribute profits to shareholders based on their pro-rata share of ownership, LLCs can distribute profits however they like. This allows for more nuanced financial arrangements among owners (ie: sweat equity or celebrity equity, etc). 5️⃣ Variety in Tax Election: An LLC can choose how it wants to be taxed, whether as a sole proprietorship, partnership or even as a corporation. This flexibility allows LLCs to adapt as they grow. Ok - so let's hear all the reasons why I am wrong. I know there are some lawyers on here ready to poke at me. Poke below! 👇I'm open-minded. #law #corporatelaw #entrepreneurship #founders #llc #lawyer

More on #EquityCompensation. Week 6 of “Startups and Venture Capital” at the University of Michigan Law School. As we put the finishing touches on the first half of the semester and our focus on #startups and their attributes, we were joined by the perfect guest who helped us bridge this dialogue to what comes next: #financings! Naji B., an investment professional with Techstars Silicon Valley, shared his insights with the class. Techstars is the most prolific #preseed stage investor on the planet, and Naji sits at the center of that universe. He’s also a recovering #entrepreneur himself, and an all-around great guy. Thank you, Naji! Building on last week’s discussion of #founderstock, we expanded into #restrictedstock more generally. Direct awards of stock are always appreciated - so long as the award doesn’t give rise to an ugly tax obligation, which can (and will) happen as the company’s valuation rises. What to do then? #StockOptions #ISOs (incentive stock options) tend to get all the love and attention, but frankly, their cousins the #NQSOs (non-qualified stock options) tend to be far more pervasive. Section 422 creates an ISO obstacle course. Recipients must be employees, the issuer must be a corporation, the options must be made pursuant to a board and stockholder approved written plan, they must be priced at current #FMV (at 110% for some), and more. Good times. If you thread the needles, there is no tax at award or exercise. The full gain is taxed at long-term capital gains rates upon the sale of the underlying stock. Needles? The front-end needles described above, but also the holding period needle. If you sell that stock within 2 years of the award, or 1 year of its exercise, it’s a #disqualifyingdisposition, and treated as a #NQSO. But look, let’s not be too hard on #NQSOs. There is tax at exercise (at ordinary rates), and on the incremental gain on sale. But the only real limitation is that they be awarded at a Section 409A compliant FMV (subject to narrow exceptions). There is much to be said for their flexibility, as well as the gamesmanship they permit their holders vis-a-vis the timing of exercise (i.e., most people exercise options only when the payday is clear). #IRC cheat codes (keep in mind these sections): - 83(b) when dealing with #vesting restricted stock - 422 when dealing with ISOs - 409A when dealing with NQSOs #DWProf

If you're a startup founder or an advisor for startups, QSBS (qualified small business stock) may already be on your radar. I wrote an article for Andersen's Q4 newsletter trying to clarify some confusion I've noticed about valuations related to QSBS. Take a read and let me know if I can help answer any questions!

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Introducing you all Eric Blue, the founder of Nevly, a VC backed startup in the fintech space. He has an excellent track record of ensaring vendors, investors and customers. Being a part of community we should ensure that we are not transacting with such people to protect stakeholders from his sweet words & failing promises. Trust me whatever he says is never gonna happen! If you have not known about his achievements, do read this article- https://lnkd.in/dnDbWQy7 (and yes this is just a sample of his achievements). Let's make him famous! Pau Sabria Sidhartha K Rishu Agarwal