zlacker

It seems like it would make sense to stop allowing people to put up their stock as collateral on these types of loan, rather than taxing unrealized gains.

Even if losing 100% is unlikely, someone could lose control of their company. Say I own 51% of my company. Harris wants 25%. I sell my shares to cover it… if my math is right, I then own 38.25%, the year after that, 28.6%, then 21.5%, 16, 12, 9… the control is gone. I lost my company. Let’s say the company was worth $1B. At 9% ownership I’m now under the $100m net worth threshold. So I would have paid $420M in taxes. Then let’s say the stock tanks… I have been selling off shares flooding the market, the direction has been taken from me, the decisions aren’t good and I’m powerless to stop it, the company’s value drops by 85%. Had I never paid any taxes on unrealized gains, my stock would be valued at $76.5M, below the threshold of the tax. But instead, I paid the government $420M, my new position is $13.5M, and the company I founded and build from the ground up is slipping away.

This may be dramatic, but it could happen. $13.5M isn’t nothing, but it is when the government taxed you 420M.

And what happens when all this stock is sold and floods the market? Does the market crash? When the market tanks, what happens to everyone’s 401k, the middle class… they get screwed.

Someone tell me why I’m wrong, because this is there my mind goes with this stuff.

I wonder if we’ll start seeing more bootstrapped companies staying private, instead of everyone going after VCs who are looking for a big return, either through going public or an acquisition.

>>al_bor+(OP)
Nope, your maths is not right, once your unrealised tax has been paid you don’t pay it every year in the same way you don’t keep paying capital gains on realised profits. Maybe read up on this before commenting.

>>andy_p+41
That math is still pretty close to right for a growing company. Let's say you're the founder of a company with a market cap that makes it to ~$100B. To get from $100M to $100B, the value of the company has to double every year for ten years. So if the tax rate is 25%, for each year the price doubles you lose 12.5% of your shares.

By the end of ten years you have barely a quarter of what you started with. If that was 51%, it's now 13% and the MBAs come to ruin your company.