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Here's a thought experiment: You're a HN reader. You have had ideas to build a startup that can help the world solve a problem. So you create it. You decide to

Here's a thought experiment: You're a HN reader. You have had ideas to build a startup that can help the world solve a problem. So you create it. You decide to fundraise, and that capital will help you succeed. You pay yourself a salary of $100,000/year, and put everything else into the company. You raise $4 MM in a seed round, valuing your company at $20MM. 10-months later, your company is doubling growth YoY again, has a solid SAAS model, and low churn. You decide to raise again. This time, you raise some more money for your company, and you're now valued at 70MM. About a year later, you're growing just as fast -- but you see a new competitor is entering the ranks. It's time to scale even faster. So you go and raise again. In a fantastic series-B round, spread across TechCrunch and HN, you raise again, at a $200 MM valuation. As the sole founder, you now own 50% of the company -- making you worth $100MM. Your salary has remained constant at $100,000/year though. And then the wealth tax hits. The new wealth tax says you're responsible to pay an annual tax of 2% on all assets over $50MM. Starting this year. Which means that you, as a private founder with no liquid assets, are now responsible for $50MM * 2% = $1MM in taxes this year. Even though your liquid income is $100,000, and you have barely that much in your bank account -- you need to come up with $1,000,000 in liquid cash this year. And since your valuation probably won't go down, it'll be at least that much, every year, for the rest of your life, until you shutter the company. So you go and try to liquidate your shares. But unfortunately, it's not a public company --- and it's not that easy finding private secondary-market buyers willing to buy the half of the founder's entire stake. So what do you do now? As far as I can tell, this is how the wealth tax would work for startup founders.

jdkee 7y ago
1. Why wouldn’t a private secondary market appear in response to the need for wealth tax share liquidation? It seems little different from a venture capital operation. 2. If you are worth $100MM you should be able to borrow 1% annually of your net worth until you can liquidate your shares.
steve19 7y ago
What you do is what all the billionaires do: take out loans backed by you assets rather than sell equity. In this scenario the banks start profiting from startups, probably more in interest than the govt will get taxes.
onlyrealcuzzo 7y ago
Here's a thought experiment. A million people read HN every day. Maybe one of them will go on to have this problem. Meanwhile, inequality is stifling global growth and leading to protests that lead to riots that are starting to look like civil wars in several countries around the world. But, you know, let's all pretend like we're future billionaires and only think about the future and not the present. P.S. -- I'm sure there would be no less than 3 startups that would attempt to solve this problem if it ever materializes (which it won't because everybody in the US thinks they're a future billionaire).
- john_moscow 7y ago
  Most of that million works at companies that started out years ago as one ambitious person's dream of becoming rich. It's a long pipeline and the chance of getting through is tiny, but that's how the economy works. If you eliminate that incentive, you will surely enjoy a short-term boost followed by a global economic decline that will be much harder to fix.
  - maneesh 7y ago
    Exactly. If you were a new startup founder in this environment, wouldn't you likely do ANYTHING to not have a valuation >$49MM? Probably deciding not to raise more funding, not to scale, not to grow and help others. I think that the side effects of a wealth tax might just end VC investing in high valuation companies altogether. I don't know if many people on HN see that as a positive.
    - tombert 7y ago
      I thought Warren's tax plan was the wealth over $50 million. Meaning that if you were worth $51 million, only one million would be taxed at 2%, meaning $20,000 would be payed.
      - maneesh 7y ago
        Yes, I believe that's correct.
nyxtom 7y ago
Relevant reading: https://www.cato.org/publications/commentary/why-europe-axed-its-wealth-taxes https://www.cato.org/publications/commentary/why-europe-axed... Before repeal, European wealth taxes — with a variety of rates and bases — tended to raise only about 0.2 percent of gross domestic product in revenue, based on Organization for Economic Cooperation and Development data. That is only 1/40th as much as the U.S. federal income tax raises. Yet for little revenue, wealth taxes are difficult to administer and enforce. They may require taxpayers to report the values of financial securities, homes, furniture, artwork, jewelry, antiques, vehicles, boats, pension rights, family businesses, farm assets, land, intellectual property, and much else. But owners do not know the market values of many assets, and values change over time, so costly wealth-tax compliance would only make accountants wealthy. And what about wealth held abroad? There is no way the Internal Revenue Service would be able to track down and value everything U.S. residents owned on a global basis. And here’s the kicker: Since the base of wealth taxes is net wealth, debt is deductible. That allowed wealthy Europeans to jack up their borrowing and invest in the exempted assets to shrink their tax bases. If a wealth tax were imposed in the United States, the farm lobby would most certainly get farmland excluded. Then rich people would borrow heavily and invest in farmland, thus shrinking the tax base and distorting the economy.
- w1nst0nsm1th 7y ago
  Then tax capital revenues like dividends, benefits, and the like.
pslam 7y ago
If you cannot find a buyer who will take a cut of a $50MM valuation, then the company is in fact worthless. Liquidity is no barrier to this — there are plenty of financial instruments available to do this transaction, even if you can't actually transfer the asset itself. Taking on debt, for example. Yes, it sucks, but forgive me if I don't shed a tear for someone who has to find a way to pay taxes on their $50M of assets. They absolutely do have options which aren't terrible. If a "wealth tax" did pass, then expect countless startups who specialize in handling the arbitrage of this.
pmoriarty 7y ago
Couldn't you get a bank to loan you the money with your shares as collateral?

jdkee 7y ago

1. Why wouldn’t a private secondary market appear in response to the need for wealth tax share liquidation? It seems little different from a venture capital operation. 2. If you are worth $100MM you should be able to borrow 1% annually of your net worth until you can liquidate your shares.

steve19 7y ago

What you do is what all the billionaires do: take out loans backed by you assets rather than sell equity. In this scenario the banks start profiting from startups, probably more in interest than the govt will get taxes.

onlyrealcuzzo 7y ago

Here's a thought experiment. A million people read HN every day. Maybe one of them will go on to have this problem. Meanwhile, inequality is stifling global growth and leading to protests that lead to riots that are starting to look like civil wars in several countries around the world. But, you know, let's all pretend like we're future billionaires and only think about the future and not the present. P.S. -- I'm sure there would be no less than 3 startups that would attempt to solve this problem if it ever materializes (which it won't because everybody in the US thinks they're a future billionaire).

john_moscow 7y ago
Most of that million works at companies that started out years ago as one ambitious person's dream of becoming rich. It's a long pipeline and the chance of getting through is tiny, but that's how the economy works. If you eliminate that incentive, you will surely enjoy a short-term boost followed by a global economic decline that will be much harder to fix.
- maneesh 7y ago
  Exactly. If you were a new startup founder in this environment, wouldn't you likely do ANYTHING to not have a valuation >$49MM? Probably deciding not to raise more funding, not to scale, not to grow and help others. I think that the side effects of a wealth tax might just end VC investing in high valuation companies altogether. I don't know if many people on HN see that as a positive.
  - tombert 7y ago
    I thought Warren's tax plan was the wealth over $50 million. Meaning that if you were worth $51 million, only one million would be taxed at 2%, meaning $20,000 would be payed.
    - maneesh 7y ago
      Yes, I believe that's correct.

nyxtom 7y ago

Relevant reading: https://www.cato.org/publications/commentary/why-europe-axed-its-wealth-taxes https://www.cato.org/publications/commentary/why-europe-axed... Before repeal, European wealth taxes — with a variety of rates and bases — tended to raise only about 0.2 percent of gross domestic product in revenue, based on Organization for Economic Cooperation and Development data. That is only 1/40th as much as the U.S. federal income tax raises. Yet for little revenue, wealth taxes are difficult to administer and enforce. They may require taxpayers to report the values of financial securities, homes, furniture, artwork, jewelry, antiques, vehicles, boats, pension rights, family businesses, farm assets, land, intellectual property, and much else. But owners do not know the market values of many assets, and values change over time, so costly wealth-tax compliance would only make accountants wealthy. And what about wealth held abroad? There is no way the Internal Revenue Service would be able to track down and value everything U.S. residents owned on a global basis. And here’s the kicker: Since the base of wealth taxes is net wealth, debt is deductible. That allowed wealthy Europeans to jack up their borrowing and invest in the exempted assets to shrink their tax bases. If a wealth tax were imposed in the United States, the farm lobby would most certainly get farmland excluded. Then rich people would borrow heavily and invest in farmland, thus shrinking the tax base and distorting the economy.

w1nst0nsm1th 7y ago
Then tax capital revenues like dividends, benefits, and the like.

pslam 7y ago

If you cannot find a buyer who will take a cut of a $50MM valuation, then the company is in fact worthless. Liquidity is no barrier to this — there are plenty of financial instruments available to do this transaction, even if you can't actually transfer the asset itself. Taking on debt, for example. Yes, it sucks, but forgive me if I don't shed a tear for someone who has to find a way to pay taxes on their $50M of assets. They absolutely do have options which aren't terrible. If a "wealth tax" did pass, then expect countless startups who specialize in handling the arbitrage of this.

pmoriarty 7y ago

Couldn't you get a bank to loan you the money with your shares as collateral?