Friday, August 5, 2011

Startups: Give Your Family Stock In Your Company

One of the things I regret not doing when I set up Mixer Lab (since acquired by Twitter) was that I did not gift any stock to my family members when incorporating.

When you set up your company, the stock is really cheap (e.g. 0.0001 cents per share or the like).  This is your opportunity to give your family, spouse, or other loved ones the equivalent of a tax free gift that could have a major financial impact long term (i.e. the taxes they will need to pay on the gift at this point could be either zero or very low in dollar terms).

More Tax Efficient For Your Family
Say for example you gave each of your parents and your siblings 0.25% of the company.  If the company sells for $100 million this translates into $250,000 for each of them*, taxed most likely as capital gains.  In contrast, if you were to just give a gift equivalent to $250,000 after the company exit the money gets taxes twice - first it is capital gains for you, then it is taxed (heavily) as a gift for them.

This becomes much more dramatic if you have a very large exit - e.g. at $1 billion the 0.25% gift could be worth $2.5 million - which means you have not only provided long term financial independence to yourself, but also for the set of people you care about.

Voting Rights
If you are concerned that the e.g. 0.5% of equity you divide amongst your loved ones will dilute your ability to control the company over time, you can ask your lawyer to give you voting proxy rights over the shares.  This means as part of the gift, the family assigns the vote associated with the shares to you.  So, you still effectively have the same voting block as you did before the gift.

Ask your lawyer (and tax accountant) for more details on the above as some things are pretty case by case.

Any other things people wish they had done when they first set up their company?

*Assuming no dilution from funding rounds - I am trying to keep the math simple)