Tell HN: Company returned 3X, but I (investor) may lose money
I invested X into the company, with a post-money valuation of Y (a minor investor). The company was bought for 3Y. Sounds good, right?
However, the deal was structured such that 1Y was paid in cash, and 2Y was paid in stock of the buying company. (1X and 2X is my respective share of the deal)
So, I got my cash back; the 2X is considered immediate ordinary income, taxed at 35% federal + 13% NYC. So, I'm 48% down on the 2X already.
Enter SEC rule 144 - I'm not allowed to sell these in the first 6 months. That might have been ok, if the buying company didn't go down some 40% since then.
So, I'm still more than break even, but not a lot more. If the company goes down (in total) more than 52% in those 6 months, I'm going to be losing money on a successful investment.
Thanks to US security and tax laws.
35 comments
[ 7.3 ms ] story [ 85.5 ms ] threadAlso, if the stock has gone down 40% can't you claim that as a loss when you sell and lessen your overall tax burden?
The reason I "told HN" is that I was not aware of how bad not optimizing the taxes could be; I thought I'm wasting 5-10% of potential profits by not optimizing. Turns out to be more than 100% on a totally ordinary deal.
> Also, if the stock has gone down 40% can't you claim that as a loss when you sell and lessen your overall tax burden?
Not really - not with AMT.
So what?
Seriously - do you think that the US govt or NYC is likely to do better with that money than he would have? Based on what?
As far as I can tell, they don't explicitly prohibit you but they say something like "we'll look at it badly if you do" in their publications. Make of that what you will.
OTOH why would I presume one should exist?
However, the entire allocated stock in this deal is ~1% of the buying company; so this protects no one. Even if all of the allocated shares were sold on day 1, the stock would not have moved more than ~5% as a result. However, the market conditions has caused it to move 40% in a week.
On the other hand, the major investors would lose out even more wouldn't they? Didn't they build any protection into their sale clauses?
But my nitpick is that in a position where he owns the stock, writing puts would increase his downside, whereas buying puts would protect him.
Stock inherently requires the acquired company to share the risk of the deal.
If the stock goes down further, you should be able to claim the loss on your taxes when you sell, which should mean you would need more than a 52% total decline to go in the red on the deal.
Are you an accredited investor? If not, you may have some legal outs to demand your money back, but you'd need to chat with a lawyer. If you were to pursue that route, though, you'd likely ruin any credibility to make future investments in other companies.
Kinda stinks that there's the gap between tax law and SEC regs timing, though. Good luck with the investment!
5% of the investment is accounted for by US tax payers. The rest are not, so I'm not in the same boat.
> If the stock goes down further, you should be able to claim the loss on your taxes when you sell, which should mean you would need more than a 52% total decline to go in the red on the deal.
No. The tax event is on the grant, not a capital gain (therefore capital loss does not cancel). Furthermore, if I fall under AMT (very likely), I can't deduct anything.
> Are you an accredited investor?
Yes.
Ooph . . . sorry. However, just so I understand, if your shares were to rise above the transaction price, would you not be subject to capital gains tax on the gain? It would seem a bit misaligned if you could be taxed on gains but not benefit from losses (however, I wouldn't put that past the codes and that still wouldn't account for AMT issues).
Good luck with it!
Yes. The way the IRS views it, I was given a an ordinary income bonus which consisted of new shares, and which was valued at $Z during the grant (and taxed as such, at that second). From now on, I own shares, so capital treatment goes into the future. If the stocks drop, I will have capital loss when I sell them -- but I need some other capital gain to net against.
This deal wasn't, and I wasn't in the driver seat to make it that way.
(I'm still learning how all of this works..)
If all of your investment was treated that way, you'd just be hosed on the profit that you made on the deal. Yes, that ignores the time value of money, but ....
What does a free market mean, anyway? Free of what? It means freedom from your neighbors, no matter if it's just one of them breaking into your house at night, or a whole bunch of them voting for laws to take what's rightfully yours by day. To put it another way, in a free market, others can't control when you buy or sell, nor can they take your money by force or fraud, even if they call it "taxes."
Your definition of both is simply wrong.
Here's the most definitive definition of capitalism (written by what many today acknowledge as its greatest champion): http://aynrandlexicon.com/lexicon/capitalism.html
From the link: Capitalism is a social system based on the recognition of individual rights, including property rights, in which all property is privately owned.
Today, we don't come close to this ideal. One example of this is that the government is the largest single landowner in the country: http://strangemaps.files.wordpress.com/2008/06/map-owns_the_... Need I mention Fannie Mae and Freddie Mac, the alphabet soup of regulatory agencies, the Federal Reserve, the giant social programs that redistribute forcibly? None of these things existed a century ago when this country was on the rise.
When I say “capitalism,” I mean a full, pure, uncontrolled, unregulated laissez-faire capitalism—with a separation of state and economics, in the same way and for the same reasons as the separation of state and church.
This is something we've never had, even in the 19th century. When we do, the human flourishing unleashed will make the lives for those who live it more vibrant and fulfilling than anything seen before on Earth.
The real definition, from wikipedia: "Capitalism is an economic system structured upon the accumulation of capital in which the means of production are privately owned and operated for profit, usually in competitive markets." Ayn Rand's definition looks more like libertarianism ("a political philosophy that upholds individual liberty, especially freedom of expression and action ... minimization of the state and sharing the goal of maximizing individual liberty and freedom.").