taxes, exit, stockTwo founders have invested $300,000 in a Bermuda (long story) incorporated startup. The company has a few other minor stockholders who have never put in any cash. The company has nearly $1 million in liabilities to lawyers. A portion of these represent contingent liabilities, but essentially the company’s liabilities far exceed its assets.
The founders control 430,000 shares, the minor share holders 70,000. The company has a remaining 690,000 treasury shares.
The company has never taken in revenue.
We all believe the company has great potential and expect to it to get acquired within a year to 18 months based upon the value of protected intellectual property.
I have contributed substantial value to the company over the past year especially in the development of: IP, the business model, and the acquisition plan, but have done so as a “volunteer”. I have no employment contract, no shares, and have received no salary.
The two founders and I are all U.S. citizens so we have to deal with U.S. taxes.
The founders recognize my contribution. I’ll join the board of directors and will receive substantial stock in the company, a percentage close to the founders.
How do I take the stock in the most tax efficient manner?
We need to address a couple of key issues in this.
First – I think I want to have full ownership of all stock the company will allocate to me at least a year before we sell the company so that any increase in the the stock’s “base” value will only get taxed as capital gains.
If my thinking in this makes sense, I want stock, not options, and no vesting plan. No one in the company has an objection to this, we just want it to make tax sense.
Second – As I understand it, if I receive stock for “services or contributions rendered” then the stock I receive will get valued as equal to my contributed work and I will need to pay income tax on that value.
What is the most tax efficient way I can get the stock?
Given the company’s liabilities, can the founders with their controlling interest simply sell me all the shares the want me to have as a block of treasury shares for a dollar or some nominal amount?
Can they sell me a portion of their own shares for a dollar?
Could we do some kind of rapid vesting coupled with me doing an 83(b) election?
Any other ways to do this?
Any guidance or context appreciated.
First – I think I want to have full ownership of all stock the company will allocate to me at least a year before we sell the company so that any increase in the the stock’s “base” value will only get taxed as capital gains.
You’ll need to consider the valuation of the company, and the fact the stocks given to you will be taxed as ordinary income based on that valuation. Since you’re talking about company which already has some value and you expect to sell it based on what it currently has - I don’t think there’s much “increase” over the FMV you’d be getting. Basically, what I’m saying is that the “tax efficient” ship has sailed.
As I understand it, if I receive stock for “services or contributions rendered” then the stock I receive will get valued as equal to my contributed work and I will need to pay income tax on that value.
No, the stock will be valued based on the company value, not the services you provided.
It works the other way around: the money you get paid for your services is what your services are worth. I.e.: if you got $300K worth of stocks for your services - then that’s what your services are worth. You’ll be taxed on the value of the stocks (based on a properly executed valuation that will be acceptable on the IRS). If you sell very closely to that valuation and the sale valuation is substantially different - the IRS will want to know what changed. If nothing changed - it means that your original valuation was incorrect and more taxes will be assessed.
Can they sell me a portion of their own shares for a dollar?
They can. The discount will be taxed as income to you. Tax-wise you’ll gain nothing.
Could we do some kind of rapid vesting coupled with me doing an 83(b) election?
You could, but that won’t solve the problem. From what you’ve described, the company is already valued for sale. I.e.: whatever you receive will have FMV close to the anticipated sale price.
Any other ways to do this?
Invent a time machine.
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