This has been discussed several times on hn and quora, and I have tried to get friends to take advantage of it. Of course, I am not a lawyer, nor is this legal advice.
1) this is a super loophole for founders. In a new entity, which costs $250 and 1h to set up yourself online, invest $100 to buy your founders shares. Hold for 5 years, sell for $10mm, save $3mm in taxes.
For an entity with multiple founders, I would spend more and get real legal paperwork done, but for a one man corp at an early stage, just be competent.
2) vc investments are not going to benefit, but angel and friends and family can. Biggest issue is no easy way to do convertible debt, but if you want a priced round, go for it. I wish I had spare cash to invest!
3) I see no reason you can't form multiple entities in parallel, as long as they meet active trading requirements. I incorporated several side projects, which probably won't generate more than trivial revenue over the next 5 years as I work on a real startup, but which start the five year holding clock. In five years, or ten, I can take them and try to make real businesses. As five years will have passed, could easily sell whenever. One might also use this for a studio model business, where e.g. each iPad app is a separate corp and may sell independently.
IMO they really didn't think through the consequences of "greater of 10x the basis or $10mm" in the context of founder shares purchased for a trivial amount.
Personally, if you meet the above requirements for an investment, you owe it to yourself to pull any 2011 or 2012 in corps forward to q4 2010. If you feel guilty for avoiding taxes, donate to the program of your choice.
Comments
This has been discussed several times on hn and quora, and I have tried to get friends to take advantage of it. Of course, I am not a lawyer, nor is this legal advice.
1) this is a super loophole for founders. In a new entity, which costs $250 and 1h to set up yourself online, invest $100 to buy your founders shares. Hold for 5 years, sell for $10mm, save $3mm in taxes.
For an entity with multiple founders, I would spend more and get real legal paperwork done, but for a one man corp at an early stage, just be competent.
2) vc investments are not going to benefit, but angel and friends and family can. Biggest issue is no easy way to do convertible debt, but if you want a priced round, go for it. I wish I had spare cash to invest!
3) I see no reason you can't form multiple entities in parallel, as long as they meet active trading requirements. I incorporated several side projects, which probably won't generate more than trivial revenue over the next 5 years as I work on a real startup, but which start the five year holding clock. In five years, or ten, I can take them and try to make real businesses. As five years will have passed, could easily sell whenever. One might also use this for a studio model business, where e.g. each iPad app is a separate corp and may sell independently.
IMO they really didn't think through the consequences of "greater of 10x the basis or $10mm" in the context of founder shares purchased for a trivial amount.
Personally, if you meet the above requirements for an investment, you owe it to yourself to pull any 2011 or 2012 in corps forward to q4 2010. If you feel guilty for avoiding taxes, donate to the program of your choice.