united-states, taxes, corporationLets assume the founders have $0 in a startup but all of the shares. Company valuation is $0.
An investor wants 20% of the company for $1,000,000 and dilutes the founders to 80%. Giving the company a valuation of $5,000,000
The founder’s shares are worth $4,000,000
are the founder’s subject to any tax at this point on their stake in the company?
Is the company subject to tax on the sell of shares that it just created?
Can this tax be avoided while retaining the paper valuations?
My understanding is no, you will not have to pay tax… yet…
It would be called Capital Gains Tax. You made an investment but each day, the value of that investment will vary up and down. The taxman will only want their cut when you cash in your chips. So for example Ubers reported $50billion valuation does not imply that the original founders of the company are paying taxes on whatever number of billions their shares are supposedly worth right now.
If the company reaches $500billion, then drops to $5million, and they sell, making a $1million personal tax profit, then they’ll pay tax on the $1million. The ride to and from the $500billion is not factored.
I hope that makes sense.
FYI: I am not an accountant but do have my own business since 1994. I own 99% of it and my business partner owns the remainder. Neither of us have ever had to pay tax on those shares. In the event we ever sell those shares, tax could become due on any monetary amount gained from having sold them.
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