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How to build or invest in a startup without paying capital gains tax
Peyton Carr is a Financial Adviser to founders, entrepreneurs and their families, helping them with planning and investing. He is a Managing Director of Keystone Global Partners.
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Founders, entrepreneurs, and tech executives in the know realize they may be able to avoid paying tax on all or part of the gain from the sale of stock in their companies — assuming they qualify.
If you’re a founder who’s interested in exploring this opportunity, put careful consideration put into the formation, operation and selling of your company.
Qualified Small Business Stock (QSBS) presents a significant tax savings opportunity for people who create and invest in small businesses. It allows you to potentially exclude up to $10 million, or 10 times your tax basis, whichever is greater, from taxation. For example, if you invested $2 million in QSBS in 2012, and sell that stock after five years for $20 million (10x basis) you could pay zero federal capital gains tax on that gain.
What is QSBS, and why is it important?
These tax savings can be so significant, that it’s one of a handful of high-priority items we’ll first discuss, when working with a founder or tech executive client. Surprisingly, most people in general either:
- Know a few basics about QSBS;
- Know they may have it, but don’t explore ways to leverage or protect it;
- Don’t know about it at all.
Founders who are scaling their companies usually have a lot on their minds, and tax savings and personal finance usually falls to the bottom of the list. For example, I recently met with someone who will walk away from their upcoming liquidity event with between $30-40 million. He qualifies for QSBS, but until our conversation, he hadn’t even considered leveraging it.
Instead of paying long-term capital gains taxes, how does 0% sound? That’s right — you may be able to exclude up to 100% of your federal capital gains taxes from selling the stake in your company. If your company is a venture-backed tech startup (or was at one point), there’s a good chance you could qualify.
In this guide I speak specifically to QSBS on a federal tax level, however it’s important to note that many states such as New York follow the federal treatment of QSBS, while states such as California and Pennsylvania completely disallow the exclusion. There is a third group of states, including Massachusetts and New Jersey, that have their own modifications to the exclusion. Like everything else I speak about here, this should be reviewed with your legal and tax advisors.
My team and I recently spoke with a founder whose company was being acquired. She wanted to do some financial planning to understand how her personal balance sheet would look post-acquisition, which is a savvy move.
We worked with her corporate counsel and accountant to obtain a QSBS representation from the company and modeled out the founder’s effective tax rate. She owned equity in the form of company shares, which met the criteria for qualifying as Section 1202 stock (QSBS). When she acquired the shares in 2012, her cost basis was basically zero.
A few months after satisfying the five-year holding period, a public company acquired her business. Her company shares, first acquired for basically zero, were now worth $15 million. When she was able to sell her shares, the first $10 million of her capital gains were completely excluded from federal taxation — the remainder of her gain was taxed at long-term capital gains.
This founder saved millions of dollars in capital gains taxes after her liquidity event, and she’s not the exception! Most founders who run a venture-backed C Corporation tech company can qualify for QSBS if they acquire their stock early on. There are some exceptions.
Do I have QSBS?
A frequently asked question as we start to discuss QSBS with our clients is: how do I know if I qualify? In general, you need to meet the following requirements:
- Your company is a Domestic C Corporation.
- Stock is acquired directly from the company.
- Stock has been held for over 5 years.
- Stock was issued after August 10th, 1993, and ideally, after September 27th, 2010 for a full 100% exclusion.
- Aggregate gross assets of the company must have been $50 million or less when the stock was acquired.
- The business must be active, with 80% of its assets being used to run the business. It cannot be an investment entity.
- The business cannot be an excluded business type such as, but not limited to: finance, professional services, mining/natural resources, hotel/restaurants, farming or any other business where the business reputation is a skill of one or more of the employees.
When in doubt, follow this flowchart to see if you qualify:
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The Urban.Us and BMW Mini accelerator focused on urban innovation names its latest cohort
URBAN-X, the accelerator program focused on companies developing technologies to increase the sustainability, resiliency and efficiency of cities, has selected seven companies for its latest cohort.
Operating as a partnership between BMW’s Mini brand and the early-stage investment fund Urban.Us since 2017, the accelerator has backed 51 companies, which have raised more than $100 million in the three years since its initial launch.
“Mini aims to inspire entrepreneurship, design and collaboration with innovative minds, and this ambition comes to life through URBAN-X,” said Esther Bahne, head of Mini Brand Strategy & Innovation.
Co-investors who have come in to invest behind the accelerator include: Fred Wilson, Brad Burnham, Edgar Bronfman Jr., BMW i Ventures, Draper Associates, Fontinalis Partners, Ekistic Ventures, Wireframe Ventures, Fifth Wall Ventures, Samsung NEXT, Story Ventures, Kairos, UL Ventures, Mark Cuban, Point 72 Ventures and Robert Bosch Venture Capital.
Some of the largest investments to date have been in companies like Blueprint Power, which raised $4 million for its technology that provides energy efficiency and demand response tools connecting real estate portfolios to the power grid; Roadbotics, roadway monitoring to optimize maintenance spending for cities, utilities and construction firms, which raised $11.4 million; and Versatile Natures, which provides safety and budget management tools for construction sites.
The latest companies to be accepted into the accelerator are:
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ChargeLab: an electric vehicle charging management service for businesses, utilities, individuals and governments.
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CoInspect: a service that automates the entire food safety and quality management workflow for restaurants and food processing facilities.
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Eva: a provider of charging stations for healthcare and emergency responders operating cargo drones and associated vertical take-off vehicles.
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Firmus: a machine learning-based software toolkit to expedite the construction design review process.
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Hades: the developer of software to evaluate sewer and flood prevention infrastructure.
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Metalmark: a new materials developer for highly efficient catalytic decomposition of air pollutants.
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UsurpPower: the creator of a marketplace for sustainable finance for renewable power generation.
“URBAN-X, Urban Us and MINI are deeply committed to advancing the low carbon, resilient, high density future of our cities through technology, investment and mentorship,” said Shaun Abrahamson, URBAN-X Investment Committee and managing partner at Urban.Us, in a statement. “Startups are critical to playing an outsized role in reimagining the core sectors of our cities — like transportation, real estate and energy — and we’re thrilled to invest in this new class of creative and entrepreneurial minds.”
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GitGuardian raises $12M to help developers write more secure code and ‘fix’ GitHub leaks
Data breaches that could cause millions of dollars in potential damages have been the bane of the life of many a company. What’s required is a great deal of real-time monitoring. The problem is that this world has become incredibly complex. A SANS Institute survey found half of company data breaches were the result of account or credential hacking.
GitGuardian has attempted to address this with a highly developer-centric cybersecurity solution.
It’s now attracted the attention of major investors, to the tune of $12 million in Series A funding, led by Balderton Capital . Scott Chacon, co-founder of GitHub, and Solomon Hykes, founder of Docker, also participated in the round.
The startup plans to use the investment from Balderton Capital to expand its customer base, predominantly in the U.S. Around 75% of its clients are currently based in the U.S., with the remainder being based in Europe, and the funding will continue to drive this expansion.
Built to uncover sensitive company information hiding in online repositories, GitGuardian says its real-time monitoring platform can address the data leaks issues. Modern enterprise software developers have to integrate multiple internal and third-party services. That means they need incredibly sensitive “secrets,” such as login details, API keys and private cryptographic keys used to protect confidential systems and data.
GitGuardian’s systems detect thousands of credential leaks per day. The team originally built its launch platform with public GitHub in mind; however, GitGuardian is built as a private solution to monitor and notify on secrets that are inappropriately disseminated in internal systems as well, such as private code repositories or messaging systems.
Solomon Hykes, founder of Docker and investor at GitGuardian, said: “Securing your systems starts with securing your software development process. GitGuardian understands this, and they have built a pragmatic solution to an acute security problem. Their credentials monitoring system is a must-have for any serious organization.”
Do they have any competitors?
Co-founder Jérémy Thomas told me: “We currently don’t have any direct competitors. This generally means that there’s no market, or the market is too small to be interesting. In our case, our fundraise proves we’ve put our hands on something huge. So the reason we don’t have competitors is because the problem we’re solving is counterintuitive at first sight. Ask any developer, they will say they would never hardcode any secret in public source code. However, humans make mistakes and when that happens, they can be extremely serious: it can take a single leaked credential to jeopardize an entire organization. To conclude, I’d say our real competitors so far are black hat hackers. Black hat activity is real on GitHub. For two years, we’ve been monitoring organized groups of hackers that exchange sensitive information they find on the platform. We are competing with them on speed of detection and scope of vulnerabilities covered.”
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Setting politics aside, Sequoia raises $3.4 billion for US and China investments
Noted Silicon Valley venture capital fund Sequoia Capital has raised nearly $1 billion for later-stage U.S. investments and roughly $2.4 billion for venture and growth deals in China, according to paperwork filed with the U.S. Securities and Exchange Commission on Tuesday.
The firm, famous for its investments in U.S. companies like Google, Instagram, Dropbox, LinkedIn, Snap and WhatsApp, is also an investor in some of China’s most successful startups.
These are companies like Alibaba, China’s e-commerce answer to Amazon; Ant Financial, a multibillion-dollar financial services powerhouse; JD.com, another e-commerce powerhouse; ByteDance, the owner of America’s latest social media sensation, TikTok; and Yitu, one of the national leaders in the development of machine learning applications.
These investments have not come without their share of controversy abroad. Yitu has been linked to the technology dragnet currently in place in Xinjiang, where an estimated 1 million religious and ethnic minorities are currently interned. Meanwhile, TikTok’s popularity in the U.S. has come with accusations of censorship in its treatment of posts that were supportive of both Xinjiang’s imprisoned population and the dissidents protesting mainland China’s increasing control over Hong Kong politics.
U.S. senators have already called for an investigation into TikTok, and Yitu was blacklisted by the U.S. Department of Commerce in October for its role in human rights violations in Xinjiang.
Setting politics aside, Sequoia has brought in $1.8 billion for its Sequoia Capital China Growth Fund V and about $550 million for Sequoia Capital China Venture Fund VII, per filings with the Securities and Exchange Commission.
It’s a sign that when valuations are concerned (ByteDance alone is now worth $78 billion, according to some reports), investors can overlook the potential political pitfalls of dealing with China.
Sequoia, led by Doug Leone, Michael Moritz, Roelof Botha and others, recently sought $8 billion for a global fund, its largest-ever fundraise, holding a first close of $6 billion in June 2018. In addition, the firm operates Sequoia Capital India, with offices in Menlo Park, Bengaluru, Mumbai, New Delhi, Singapore, Tel Aviv, Beijing, Hong Kong and Shanghai.
News of the fund comes at the tail end of another strong year for venture capital fundraising in the U.S. Firms, including 41-year-old NEA, filed to raise as much as $3.6 billion for a single fund. Meanwhile, Norwest Venture Partners, DCVC and Accel all closed new vehicles exceeding $500 million.
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Fronted, from former Bud, Monzo and Apple employees, wants to make life easier for renters
Fronted, a new London-based startup aiming to make life easier for renters, is breaking cover today.
The company, founded by Jamie Campbell, Simon Vans-Colina and Anthony Mann — former employees at Bud, Monzo and Apple, respectively — will launch early next year with a fintech product to help renters finance their rental deposits.
The plan is get accepted into the FCA “sandbox” program (run by the U.K. financial services regulator) to begin lending cash that can only be used for a rental deposit.
The thinking is that by using Open Banking and other financial technology and offering a credit product designed to finance deposits directly, Fronted can lend more cheaply than existing options, such as credit cards, pay-day lenders and overdrafts, or insurance-backed membership schemes, and at lower risk.
“Renting sucks — anyone who rents knows it,” Fronted CEO Jamie Campbell tells me. “There are so many problems to solve and we intend to tackle them all bit by bit. But first, we are going to pay people’s rent deposits for them so they can pay us back in bite-size manageable amounts. Deposits are a large upfront expense and most people either use mum and dad to sort it out or stay where they are (in the worst cases they do to pay-day lenders).”
In a call late last week with Campbell and CTO Vans-Colina, the pair explained that renters that apply to use the Fronted service will be asked to link their bank using Open Banking, therefore sharing their recent transaction data, and provide details of the property they wish to rent. Then, once Fronted has run the required checks and agreed to provide credit, the startup sends the money directly to the estate agent to be placed in the U.K.’s Deposit Protection Scheme, meaning that the loan never touches the renter’s hands (or wallet).
“Customers will have a direct debit to pay us back over a set schedule, or they can pay it all off when they have the money to do so, [and] we don’t charge any fees,” says Campbell. There is also a planned “holiday mode” that will allow customers to temporarily reduce their monthly payments in order to help avoid falling into financial difficulty.
“Ultimately this first product is designed to be very convenient and we believe people will opt for this more manageable alternative to a normal deposit,” adds Campbell. “There are customers of ours that will be in ‘hidden households’ unable to move because of the upfront fees… Deposits can [also] sometimes take a long time to be returned from the schemes (something the government recently launched an enquiry into). Fronted wants to serve people who might otherwise be ‘double-exposed’ by deposits. We hope this first product increases social mobility by providing liquidity when people need it.”
Initially, Fronted will generate revenue through interest charged. It then plans to extend its fintech product offering with additional money-advance services “to help smooth out the bumps of renting.”
“We also intend on rolling out a ‘turn up and turn on’ service for utilities and internet,” says the Fronted CEO.
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Postscript raises $4.5M to help Shopify shops stay connected with customers over SMS
Back in February, we wrote that Postscript “wants to be the Mailchimp for SMS.” Now they’ve raised $4.5 million to help get it done.
This round was led by Accomplice, and backed by Kayak co-founder Paul English, Wufoo co-founder Kevin Hale, Klaviyo co-founder Andrew Bialecki, Drift co-founder Elias Torres, Front co-founder Mathilde Collin and Podium co-founders Eric Rea and Dennis Steele. The Postscript team is currently made up of 14 people.
Postscript is meant to help e-commerce companies — specifically Shopify shops, currently — connect with their existing customers over SMS. Their Shopify plugin lets store owners run SMS marketing campaigns with customers who’ve opted in, have two-way conversations with users who respond and analyze the data to figure out what’s working.
Got a new product hitting the shelves and want to let your most frequent customers know first? Plug the message into Postscript’s dashboard, tell it what segment of your customer base you want to receive it and send away. Their analytics backend will tell you how many people received it, how many actually clicked through and how much revenue you pulled in from those clicks.
If a customer types out a text and responds, it’ll pop up in the backend like a support ticket. Shop owners and employees can respond and have direct conversations, answer questions and close out the ticket through the dashboard — or they can automatically pipe them into services like Zendesk or Zapier.
But what about spam? Our text message inboxes tend to feel like the last refuge from the overwhelming onslaught of marketing messages that have ruined e-mail; do we really want shops pinging our phones directly every time they’ve got a new pair of pants?
It seems like Postscript is pretty mindful of this, and is building things in a way that limits just how “spammy” anyone on the platform can be — partly because (as we’ve seen with e-mail) flooding users with unwanted messages ensures that messages just don’t get opened, and partly because SMS is much more tightly regulated than many other messaging protocols. Under the Telephone Consumer Protection Act (TCPA) in the U.S., for example, SMSing marketing messages to someone without an explicit opt-in can get the company nailed with fines of thousands of dollars per text.
As Lucas Matney wrote in February:
The opt-in process for phone communications is already a bit more codified in the U.S., and as companies attempt to stay in the good graces of GDPR for fear of the EU god, it might be more likely they tread carefully.
As such, everything is opt-in, and easily opted out of if a user changes their mind. It also helps, of course, that sending SMS isn’t free for the companies. Each SMS you send to a customer who doesn’t care is money wasted — so there’s interest on all sides on limiting messages to just the folks who actually want them.
Postscript pricing varies depending on how many messages a shop is looking to send each month. Paid plans start at $50 a month for 1,500 SMS, climbing up to $2,000 per month for 83,000 messages — after that, they ask shops to reach out for a custom plan. Postscript co-founder Alex Beller tells me the company currently has around 530 paying customers, each spending anything from $50 per month to “the mid five figures.”
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SoftBank pours $100M into Mexico’s Konfio
Three months after Goldman Sachs lent $100 million to Mexican fintech Konfio, SoftBank has invested another $100 million into the financial services company. The investment confirms Reuters’ August report that SoftBank was in advanced talks with the startup — now one of the most heavily funded fintechs in Mexico.
SoftBank is continuing to expand its Mexican portfolio, which now includes used car buying platform Kavak and payments startup Clip. Aside from Mexico, SoftBank has primarily focused its $5 billion Latin America fund on Brazil — and recently marked its entry into Argentina with an injection into financial services company Uala in a $150 million investment co-led by Tencent.
As traditional banks shy away from small to medium-sized business loans in Mexico, Konfio’s credit underwriting service provides a faster alternative. Konfio uses a data-first approach to enable fast credit assessment for SMBs looking to grow their businesses. The service can disburse credit in a one-day turnaround, as opposed to locking users into a traditional months-long approval process that can often require collateral.
Meanwhile, if you’re a startup gathering massive amounts of data on Latin America’s growing middle class, SoftBank might be interested in your growth funding. The Japanese conglomerate seems to want to know everything it can about Latin America’s consumer spending habits, mobile usage and personal banking user behavior.
Watch Konfio founder and CEO David Arana’s panel at TechCrunch’s São Paulo event here.
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This browser extension unhides Instagram Likes
Instagram is hiding Like counts to make people feel better. But what if you’re curious, competitive or just petty? Now you can re-embrace the popularity contest by installing the Socialinsider Chrome extension that reveals Instagram Like and comment counts. “The Return of the Likes” extension overlays the numbers of Likes and comments on the top-right corner of posts on Instagram’s website. If you don’t want Instagram’s overprotective helicopter parenting, now you can download the extension here to put an end to it.
Obviously, it’s not as useful as showing Like counts right in the Instagram mobile app. You probably aren’t going to switch to browsing Insta just on the web, but if you see a post you want to know the Like count of, you can easily send yourself the permalink and open it on a computer.
Instagram is currently testing hiding Like counts with a percentage of users in every country worldwide. It started the experiment in Canada in April before adding six more countries in July and then the U.S. last month. Facebook launched a similar hidden likes experiment in Australia in September.
TechCrunch tested Return of the Likes and verified that it works. It comes from social media analytics company Socialinsider, which offers software for measuring engagement and benchmarking performance against competitors. The company insists that “No data is sent to Socialinsider servers.” We asked Instagram if the Chrome extension was in compliance with the app’s rules, and will update if we hear back.
As social media evolves, the emerging trend is for platforms to step in to protect users. In many cases, it’s warranted. Like counts can hurt people’s well-being by leading them into envy spirals comparing themselves against peers, or coercing them to self-censor to avoid an embarrassingly low Like count. Still, the question remains whether users deserve control over their own experience. Should we be able to opt back in to seeing Like counts, the way we have controls over block lists of offensive words?
After the platforms step up to ensure safety, we’ll have to decide when we want to step in and demand to see what’s been covered up.
Additional reporting by Lucas Matney
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Rapyd, which offers fintech-as-a-service via a single API, adds $20M more to its coffers at a $1.2B valuation
One of the biggest trends in the world of financial technology has been an ongoing push towards consolidation, where larger fish are snapping up smaller fish (including a proliferation of interesting startups) to get improved economies of scale in a business model where every transaction brings incremental returns. But today, a startup that has built the concept of consolidation into its basic DNA has raised another round of funding to continue doubling down on its business.
Rapyd — a London-based startup that has built an API that lets customers tap into a range of financial services spanning payments, checkout, funds collection, fund disbursements, compliance as a service, foreign exchange, card issuing and soon logistics across a wide range of geographies — has picked up an additional $20 million. Rapyd’s valuation with the funding is now at $1.2 billion (up from just under $1 billion in October).
The $20 million comes from new investment firm Durable Capital Partners.
Notably, it was only in October that Rapyd announced a $100 million raise. CEO and co-founder and Arik Shtilman said that Rapyd has now raised $180 million in total, with previous investors in the startup including Oak HC/FT Tiger Global, Coatue, General Catalyst, Target Global, Stripe and Entrée Capital. (Stripe, itself a fast-growing fintech upstart, remains only a financial investor in the company, Shtilman confirmed.)
Durable is the firm founded by Henry Ellenbogen, formerly a star investor at T. Rowe Price, in what Rapyd said was the firm’s first investment. (Note: Durable was also announced earlier as an investor in Convoy’s $400 million round, some clear signs that it’s open for business now.)
With Rapyd only recently raising a round, Shtilman said that the reason for the — err — rapid follow up was because the company is gearing up to make some acquisitions, as it too moves in on the consolidation trend by adding in more tools into its “Swiss Army Knife” of services.
“We’ve started to look at two acquisitions that were bigger than what we originally planned, with prices more in the range of $100 million,” he said. Up to now, Rapyd has largely built its technology from the ground up, but this will be about “getting at new business very quickly,” he added. Both deals are in progress now and are likely to close in February / March. One is of a card issuing platform (a la Marqeta), and the other is of a company based in Asia Pacific that is a significant player in payments in the region.
The focus on Asia Pacific both for testing out new services and acquisitions is in part because this, along with Latin America, have shaped up to be important geographies for the company. In the last three months, Rapyd has signed on 20 additional large-scale companies, Shtilman said, with several of them based out of, or serving, customers out of the two regions.
In fact, Rapyd doesn’t talk much about actual customers, but they include e-commerce merchants, gig-economy platforms — including Uber — financial institutions, and technology providers. The basic pitch is that financial services are complex, and providing one like payments often means having to offer others. Building these from scratch if this is not your core competency can be time-consuming and costly, and so that is where a company like Rapyd steps in with its API.
This is what attracted its newest investor, too. “Durable Capital Partners LP has a vision to identify and invest in promising early stage growth companies and invest in teams that have bold ideas but can also execute at a world-class level and build much larger companies,” said Ellenbogen in a statement. “I believe the Fintech-as-a-Service category has tremendous potential as companies seek to embed financial services as an integral part of the next generation technology stack. I believe Rapyd is very well positioned to drive this trend and I believe Arik’s track record in scaling cloud-based businesses will deliver success in this sector.”
When we last talked with Rapyd in October, we asked Shtilman about whether the company would ever move into logistics as part of its range of tools. After all, when you think about the complexities of procuring, storing and moving goods, it’s clear that logistics is one of the cornerstones you need to get right in an online business.
He said that this was on the company’s roadmap, and now Rapyd is in a pilot in Indonesia — an interesting test bed, considering that the country’s is spread across thousands of islands — where it has integrated a logistics service and given access to a single merchant as stage one of its closed beta. It’s also in discussions with other companies about how it can incorporate their services into the Rapyd platform to provide further “logistics as a service” to customers. He also confirmed the Durable has been a help here, by making an introduction to Convoy as part of that wider strategy.
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Orbion partners with US Department of Defense on small satellite propulsion tech
Michigan-based in-space propulsion startup Orbion is working with a major new partner: The U.S. Department of Defense (DOD). Orbion has secured a research contract from the U.S. Air Force Research Laboratory’s Propulsion Directorate, specifically aimed at helping the DOD “enhance resiliency of U.S. systems in space.”
Basically, it sounds like that will boil down to seeing how Orbion’s propulsion technology can be applied to DOD satellites when used in larger constellation form, to provide those satellites with the ability to move propulsively while in orbit, and to do so in a way that can scale cost-effectively. In a press release announcing the news, Orbion CEO Brad King says that volume is a strategy when it comes to fortifying U.S. systems in space against potential foreign attack.
“One way to increase the resilience of space systems is to improve our nation’s ability to build and deploy small satellites in large numbers at low costs,” said King in a statement, “Orbion is developing mass-production techniques to build propulsion systems for commercial customers. With this research contract we are investigating how or if our manufacturing processes must be modified to meet DOD requirements.”
It’s true that in the past, the U.S. and other international powers with access to space have mostly focused on large, expensive, singular pieces of orbital hardware as their strategic assets. Shifting to the small satellite constellation approach currently being pursued by a number of private companies definitely has advantages in terms of redundancy and replaceability.
Orbion’s entire business proposition as a startup is that it’s applying mass-production to in-space thrusters, which will bring down costs and make their technology accessible to a much wider range of potential clients, and practical for application in small satellite design. The DOD may not have the same budget-constraint issues as a cash-strapped satellite startup, but long-term cost savings that also comes with a tactical advantage is a hard bargain to pass up.
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