![]() The answer is less than certain the income tax treatment of the founder shares is an open question. Without a target and investors, though, the transaction will not consummate there is entrepreneurial risk. The founder shares seem to follow these two examples. There is a definite business plan to get to a public offering. However, the tax code provided an option for founders with these types of equity grants. A founder could elect under IRC section 83(b) to take the fair market value of the equity into income in the current year. Using our prior example, the founder would take $0 into income in 2020 because the equity was worthless. When the company is sold in 2025, the $20 million in equity would be taxed at capital gains rates. Because the equity was held longer than a year, the current federal rate of 21% would apply. The 83(b) election would save the founder $5.3 million ( – ) in federal income taxes.īut, is this really like a start-up? Or is this like a public issuance with an acquisition? If it is more comparable to the latter, we have a bargain-sale question. For example, the company issues stock to the founders for $1 per share when the stock is worth $10 per share. Is this a bargain sale in which the excess over the $1 is compensation to the founders? But there was no public market for the shares when the founder purchased them and they are restricted, dependent on the consummation of the de-SPAC transaction. This was a blank-check company, so it really is not a bargain sale. Say that the company is sold in 2025 after going from $0 to $100 million. A founder receiving 20% of the equity based on work performed would have $20 million in income. This would be taxed at ordinary income rates, currently the top rate of 37% for federal purposes. ![]() To make heads or tails of this, comparisons to traditional structures may be illustrative. In an early-stage start-up, founders often receive compensation in the form of equity. There is a ton of entrepreneurial risk. The entity and the equity basically have no value. Yes, the services performed by the founders might be classified as income, but it would not be realized until the founder disposes of the shares. After all, they could fall to zero at any point until they are monetized. The income tax issue arise when the founder group receives the promote: is the promote in return for services? This question has generated a lot of controversy. On one hand, the owners are paying for units, which does not sound like compensation. On the other hand, the value of these shares can explode based on the founders’ performance, which sounds like compensation. If the new company goes under after the first month, the public investors and founders would share those losses equally. This differs qualitatively from private equity or hedge fund promotes, which have high-water markets. Those founders have only upside potential. ![]() ![]() What income tax questions arise? There is a lot of unpacking here. When the SPAC merges with the target, the founder’s shares convert into identical class A shares. For example, if the SPAC’s IPO is worth $500 million, then the founder shares would be worth $100 million when the de-SPAC acquisition occurs.
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