Author Topic: Treatment of Restricted Stock Across Tax Years from Startup Exit  (Read 1159 times)

maizefolk

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About four years I started a company with three other people. The company (OldCorp) did R&D, got some federal funding but never made a profit so we'd like to sell it. We found a potential acquirer who is interested in buying our company as part of a rollup that they are doing in this space (NewCorp) but we'd only be paid in restricted stock of the new combined venture (likely with a six month holding period).

Personally I don't have any confidence that OldCorp will ever make any money so I am happy to sell it for a price greater than $0. My question is whether there any way this deal could end up being worth less than $0?

October 1st of 2022, the NewCorp acquires all units of my existing company (OldCorp) in exchange for stock in the new company at some price.
Presumably the I owe either income or capital gains tax on the difference between the value of the stock I am receiving and my cost basis in OldCorp at this point.

April 1st of 2023, my holding period expires and I sell my NewCorp stock.
If the value of NewCorp's stock has dropped to less than the value of the taxes I paid last October (or to zero) is there any way to offset that against my previous year's tax liability from when OldCorp was acquired? Or am I just out the money, at least until I've generated enough future capital gains to offset the big capital loss of NewCorp's stock dramatically declining?

seattlecyclone

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Re: Treatment of Restricted Stock Across Tax Years from Startup Exit
« Reply #1 on: May 24, 2022, 05:18:49 PM »
When a former employer of mine was acquired in an all-stock transaction, the OldCorp->NewCorp stock swap was not a taxable event. My NewCorp stock position retained its original cost basis from when I acquired the OldCorp shares, and I paid regular long-term capital gains tax when I sold it. This was one publicly-traded company buying another, not sure if that matters or not. There may be a way to structure your sale in a similar way, and you should consider seeking some expert advice on how to make this happen.

maizefolk

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Re: Treatment of Restricted Stock Across Tax Years from Startup Exit
« Reply #2 on: May 24, 2022, 06:25:40 PM »
It hadn't even occurred to me that might be an option. (New stock inherits the old basis and pay tax when I sell.)

Expert advice is definitely something I'm seeking out but knowing the right potential things to ask about helps a lot to make the most use of that expertise.

Thank you @seattlecyclone!

MustacheAndaHalf

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Re: Treatment of Restricted Stock Across Tax Years from Startup Exit
« Reply #3 on: June 05, 2022, 01:43:08 AM »
... we'd only be paid in restricted stock of the new combined venture (likely with a six month holding period).
If you're surprised OldCorp isn't worth much, maybe NewCorp stock isnt as valuable as it appears?  And given market conditions, a discount for being cashed out might be worth it.

In your situation, if I could get 90% cash in a few weeks or 100% stock I had to hold 6 months, I'd take the cash.  Maybe it's worth asking about cashing out, if that doesn't send too bad a signal in the negotiations.