Tell HN: Company returned 3X, but I (investor) may lose money
35 comments
Sounds like you're in the same boat as everyone else in your round, right? It's simply a function of the timing of the deal (less than a year since you invested, apparently) and the deal structure (cash vs. stock).
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!
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!
> Sounds like you're in the same boat as everyone else in your round, right?
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.
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.
>No. The tax event is on the grant, not capital gain (therefore capital loss does not cancel). Furthermore, if I fall under AMT (very likely), I can't deduct anything.
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!
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!
> if your shares were to rise above the transaction price, would you not be subject to capital gains tax on the gain?
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.
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.
It's obvious, but this fact escapes so many people today: we do not have capitalism in the US.
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."
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."
Capitalism doesn't require a free market, and the definition of a free market allows for tax collection by the government.
Your definition of both is simply wrong.
Your definition of both is simply wrong.
I don't agree.
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.
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.
> 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.
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.").
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.").
Why didn't you invest the money via a loan to an offshore company that then invested the money? That way you'd only pay tax when you paid yourself out of that company.
Why wasn't some of the cash treated as tax-free return of capital?
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 ....
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 ....
I always thought these deals were typically done as stock swaps so it doesn't affect your capital gains?
Only if done in very specific way (google "triangular merger", there are several variations).
This deal wasn't, and I wasn't in the driver seat to make it that way.
This deal wasn't, and I wasn't in the driver seat to make it that way.
That's what I thought. How do they offer cash in that type of deal? As a fixed price purchase agreement that hits after the holding period?
(I'm still learning how all of this works..)
(I'm still learning how all of this works..)
No, there can be a cash at the beginning, no larger than 20% or 50% of the deal (depending on whether it is reverse or forward merger. Get a tax specialist if these details matter to you and you are in the driver seat)
With any luck perhaps some day I'll be in the driver's seat. For now I'm just taking advantage of whenever I see an opportunity to pick up some knowledge. :)
Couldn't you have written 6-month PUT options?
I probably could. The stock went down during the week I was trying to get clearance from my lawyer :( It used to be illegal to hedge against SEC rule 144; Apparently, it is now legal (but check with your lawyer before you hedge -- don't trust an anonymous person on the internet)
Sorry, I should have mentioned IANAL and not even a US citizen. It'd probably be seen as trying to circumvent laws wouldn't it? That'd be bad.
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?
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?
Nit-Pick: 'Writing' == selling an option, and he would've wanted to buy puts (if it were legal).
I actually agonized over "writing" vs "selling". In the end, writing seems more natural.
Yeah, I like using 'writing' better as well.
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.
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.
you are right. I got that back to front didn't I?
Yeah. I was concerned with even making my initial comment because I didn't want to sound like an ass. But I have a lot of experience with derivatives, so hoped I'd be looked at as a benevolent expert rather than a blowhard windbag. :-)
Kevin, be assured, it didn't come across like a blowhard windbag. Thanks again for the correction.
Do SEC rules prohibit you from hedging?
They used to explicitly prohibit you.
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.
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.
Why would they care? I really can't think of a rationale for that stance.
OTOH why would I presume one should exist?
OTOH why would I presume one should exist?
Well, it's basically a protection against intricate pump-and-dump schemes that include mergers and acquisitions - the rule basically says shares allocated (rather than _bought_ or invested into) need to be held for 6 months. (It is sometimes known as "lockup period", and versions of it exist in many countries).
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.
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.
Ouch. Now you know what it feels like to work for a startup.
Sorry you're going through this, but it is a great example of how certain tax and security laws create unhealthy barriers to the free market. Personally, I've never understood the logic of paying tax on stock that you receive before you dispose of it. Seems that tax policies like this do nothing but keep small investors out.
And the sadder part is that richer investors know their way around those taxes better than new comers because they have access to accountant professionals who can advise to pay less tax.
I'm not a tax expert so this assumption may be wrong, but if the 2X is being taxed as ordinary income at 35% wouldn't that imply that beagle3 is making at least $379,150 + 2X this year? I would consider someone with that kind of income to be rich.
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?
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?
Well, it might be _just_ 33% depending on how my other projects work out this year. Not much of a difference those 2%. I've been doing well so far with actual work, and my investments seem to be going well, except that I keep getting hit on the crazy taxes (to the point that GOOD investments end up as losses!)
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.
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.
> wouldn't that imply that beagle3 is making at least $379,150 + 2X this year? I would consider someone with that kind of income to be rich.
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?
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?
In my comment I did not state whether I agree or disagree with the current US tax laws and that was not the point. I was responding to the post above mine which I think made some incorrect assumptions concerning beagle3's income level and ability to afford professional accountants.
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.