I invested in a startup company that was valued at $2M post-money when I invested in it.
A couple years later they are raising more money that will probably value the company post-money around $25M. With dilution from the new financing my shares are now valued at around 7.9x cash on cash gain. (e.g, - If I invested $10,000 now it is worth $79,000 on paper)
So my question is does this theoretical $69,000 increase in value have any tax implications for me?
Appreciate if anyone has been in this situation before.
I'm definitely no expert here, but generally you would be taxed on the gain, yes, but only when/if you decide to sell your shares. You may be able to reduce the amount of taxes you end up paying on the investment if the investment qualifies - look up IRC Section 1202.
Someone else more involved in tax practice can probably chime in for better explanation, but that can probably get you started.
No tax implication until you sell (realized). If the company qualifies, you can take the QSBS (Qualified Small Business Stock) deduction when you sell it. Has to be after five years holding period and the companys assets less than 50M. More info http://sfvc.com/2014/01/22/what-every-vc-angel-investor-and-entrepreneu…
If Hilary doesn't get elected you can expect to pay long term capital gains at the current rate only when you sell.
Honestly, if Hillary does get elected, you can still probably expect to only pay 15% when you sell. You'd only really have to worry if Warren or Sanders somehow manage to get elected. Which I see happening only if Hillary falls out of a plane or is revealed to be a serial axe murderer.
Don't forget the 3.8% additional tax on net investment income provided by the ACA for people who make over $200,000 singly / $250,000 jointly. And the 15% goes to 20% if he makes over $413,200 singly or $464,850 jointly. And of course add on any additional state tax rates. Depending on his income level and where he lives that 15% could be north of 30%.
No it shouldn't have any tax implications unless they're doing something weird and converting from a pass through to a c-corp, and doing it incorrectly. I'd make sure with your accountant but you should be fine.
How does an LBO associate who is investing in VC deals not understand basic tax deferral concepts?
Because most PE guys don't deal with VC investments and the tax consequences. I know as and undergrad you're so awesome that you'd know everything but a tax basis question is completely understandable.
I mean there wasn't enough detail provided to receive any advice other than "you don't owe taxes until you realize your gain".
There are not tax implications but what kind of awful dilution to only make 1.9x when the valuation is going up by 12x!
My comment was made in jest but I expect that cap gains rhetoric (and class inequality) will play a major role depending on who gets the GOP nomination. Hilary has said historically that she would not raise rates above 20% (where they are now plus the 3.8%). Interesting to remember that rates were at 28% under Reagan. I would expect Hilary (similar to Bill) to push for a tax code that pushes for higher taxes on wages but not capital income for high earners. Rubio has endorsed a 0% cap gains rate. I wouldnt mind paying such high taxes if the funds were utilized more effectively which is a whole other debate.
Thanks guys for the input. That was my assumption but wanted to gut check it. The financing is happening this year so I wouldn't have had to really deal with it until next year even if there was a issue...
optrader47 You're completely correct... I was calculating off the incorrect share count (I've invested in the seed round and re-upd for the series A at the new valuation and meant to just isolate my seed round shares as they are the only ones increasing in value). The correct dilution impact is a 7.9x MoM which I updated in the post. My effective paper value all in with new capital is 4.9x my total cost basis.
Out of curiosity, what were the terms of your investment? Was it a convertible note with a cap? preferred?
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