5 ms·

It is in the article "Mr. Thiel purchased his founders’ shares in PayPal through his Roth IRA during PayPal’s formation" I am willing the venture a guess that

by sida 5y ago

It is in the article "Mr. Thiel purchased his founders’ shares in PayPal through his Roth IRA during PayPal’s formation" I am willing the venture a guess that the initial valuation was far greater than 0.001 per share. And this was all an accounting trick to exploit IRA

ajju 5y ago
All shares issued at founding have a near-zero cost because, while you technically need to buy the shares, the company (by definition) is worth $0 on the day you start it. There is no tax gimmick involved in that part. If you require entrepreneurs to buy shares of their own company for large sums of money on the day they start the company, it would dissuade many entrepreneurs. On the day I incorporated my company in Delaware, my debt exceeded my assets and the startup was going to be my only profession.
- machinebun 5y ago
  Sure - there's no problem with valuing those shares at $0.001 in general, because there's not much that valuation matters for in the short term (eventually you will pay different taxes depending on the end result of your company). However, Roth IRAs specifically are a tax shelter and have contribution limits, so valuations matter a whole lot for them (difference in $0.01 per share vs $0.001 per share would be a difference of $500M vs $5B today). That's why I think illiquid (or non-market cleared) securities should not be allowed in Roth IRAs.
  - ska 5y ago
    > That's why I think illiquid (or non-market cleared) securities should not be allowed in Roth IRAs. That + a cap on tax shelter would solve the issue, if it needs solving. Perhaps also prohibit equity from any source where you aren't arms length.
- Scoundreller 5y ago
  > the company (by definition) is worth $0 on the day you start it. Is it? If Elon Musk forms a corporation tomorrow, its market value is more than $0 before he does a single thing with it. And that’s all the IRS should care about for Roth contribution limits: market value. If I buy 1000 shares of PayPal from my mom for $2000 (mkt value: a lot more!) and put that into my IRA and tell the IRS that $2000 is the price we agreed (in the marketplace of the dinner table).
  - tomp 5y ago
    > If Elon Musk forms a corporation tomorrow, its market value is more than $0 before he does a single thing with it. If there’s anyone stupid enough to value such a company at more than $0, Elon should sell that company and just start another one. Infinite money machine. He should call it Bitcoin or NFT or something similar...
    - Scoundreller 5y ago
      People will throw money at a company that has done nothing solely based on the people behind it. I mean, people throw their money at companies that actively burn money with unlikely prospects of overcoming their death spiral. One that hasn’t even started should at least be worth much much more than those.
  - ajju 5y ago
    If, at the moment of formation, the company has a binding agreement with Elon Musk (the founder) requiring their services for a fixed time allocation and at a fixed rate of remuneratin, then yes that contract has value and therefore the company has value. The value will depend on the remuneration to Mr. Musk vs the perceived value of his services. Even so, it would be as one of a small % of outliers with high-value founders amongst the millions of companies incorporated every year. Was Peter Thiel as valued when he started paypal as he is now? No. More importantly, acknowleding that very few companies may have value at inception due to the value (and commitment) of their founders' time doesn't make it any easier to systematically value that time. To legally enforce this, you would have to have valuation and audit service providers who do this - creating a bureaucratic hurde that every founder - famous or not has to go through - just to start a company. It is my opinion that the cost of doing this - in reducing or slowing down the number of companies started and the lost taxes as a result - would significanty outweigh any gain in taxes from taxing the notional value of Elon Musks's presence as part of his own company. All laws that apply to humans, particular compliance related laws, have significant second order effects. The second order effect of taxing the popularity of folks when they start a company is that thousands of less rich, less popular, less privileged, and less confident first time founders will face an additional hurdle when starting a business and they may never start one, never get rich through one. Ultimately, inequality would likely increase and rich established founders like Elon Musk and Peter Thiel would likely be more entrenched and benefit more from this, not less.
tylermenezes 5y ago
When the company is formed the valuation is genuinely very small because it has no assets, customers, etc. Buying some of your shares in a Roth IRA at this point is relatively common, enough so that I've heard multiple people suggest that founders do it.
- Scoundreller 5y ago
  Yeah, I doubt Thiel came up with this himself. Was probably recommended by accountants whom should all be familiar with Roth IRAs. But the possibilities of windfall tax-free profits made sure everyone kept quiet about it.
throwaway5752 5y ago
I'd guess $.001 is the par value and there was no 409A valuation. The initial basis doesn't really matter if it is essentially zero or $1 or $5 in this case. The implied current price on the founders shares is approximately $2500. I agree with Propublica's take Yet, from the start, a small number of entrepreneurs, like Thiel, made an end run around the rules: Open a Roth with $2,000 or less. Get a sweetheart deal to buy a stake in a startup that has a good chance of one day exploding in value. Pay just fractions of a penny per share, a price low enough to buy huge numbers of shares. Watch as all the gains on that stock — no matter how giant — are shielded from taxes forever, as long as the IRA remains untouched until age 59 and a half. Then use the proceeds, still inside the Roth, to make other investments. I also think that there should be a cap on tax free distributions sheltered by Roths, and they should not be transferable upon death.
- marris 5y ago
  I disagree with ProPublica's take. If it was as simple as "pay just fractions of a penny per share... watch as all the gains..." then we would all do it. Not just with Roth IRAs, but with our entire portfolios. The reason we don't all do this is because startups are very very risky. Some people will succeed and walk away with windfalls. Other people will lose their shirts. If there was arbitrage, there would be a an "app for that" and there would be more billionaires walking around.
  - lordnacho 5y ago
    What they seem to be suggesting is that a fair valuation (well reasoned given all information) of the shares would have put the investment at millions of dollars, but due to a peculiarity of historical accounting, they could be put at worth $2K because that was the creation price and the last print. For instance, it might be that a funding round was about to happen. This is never a sure thing, so you could claim that the shares are not worth the full price (and in any case the only trade was at 2K), while privately thinking "hmm, my shares are now worth x millions". You then sell the shares to the Roth, thinking yourself that you're putting x millions in the vehicle while reporting 2K. Doesn't sound illegal to me, but it also doesn't sound like things are supposed to work this way.
woah 5y ago
Are you saying that Peter Thiel should have known that he would turn PayPal into a multibillion dollar business, and because of this, the shares were not really worthless? EDIT: That was sarcastic, but re-reading, that basically is what the article is saying: > Get a sweetheart deal to buy a stake in a startup that has a good chance of one day exploding in value. 20-20 hindsight
- vmception 5y ago
  it’s honestly no wonder that the masses assumes inaccessibly expensive accountants are necessary to simply think clearly
vmception 5y ago
Its still surprising to me that you got this backwards. There is no reason to ever choose a higher par value than that then when forming a company.

by sida 5y ago

ajju 5y ago

All shares issued at founding have a near-zero cost because, while you technically need to buy the shares, the company (by definition) is worth $0 on the day you start it. There is no tax gimmick involved in that part. If you require entrepreneurs to buy shares of their own company for large sums of money on the day they start the company, it would dissuade many entrepreneurs. On the day I incorporated my company in Delaware, my debt exceeded my assets and the startup was going to be my only profession.

machinebun 5y ago
Sure - there's no problem with valuing those shares at $0.001 in general, because there's not much that valuation matters for in the short term (eventually you will pay different taxes depending on the end result of your company). However, Roth IRAs specifically are a tax shelter and have contribution limits, so valuations matter a whole lot for them (difference in $0.01 per share vs $0.001 per share would be a difference of $500M vs $5B today). That's why I think illiquid (or non-market cleared) securities should not be allowed in Roth IRAs.
- ska 5y ago
  > That's why I think illiquid (or non-market cleared) securities should not be allowed in Roth IRAs. That + a cap on tax shelter would solve the issue, if it needs solving. Perhaps also prohibit equity from any source where you aren't arms length.
Scoundreller 5y ago
> the company (by definition) is worth $0 on the day you start it. Is it? If Elon Musk forms a corporation tomorrow, its market value is more than $0 before he does a single thing with it. And that’s all the IRS should care about for Roth contribution limits: market value. If I buy 1000 shares of PayPal from my mom for $2000 (mkt value: a lot more!) and put that into my IRA and tell the IRS that $2000 is the price we agreed (in the marketplace of the dinner table).
- tomp 5y ago
  > If Elon Musk forms a corporation tomorrow, its market value is more than $0 before he does a single thing with it. If there’s anyone stupid enough to value such a company at more than $0, Elon should sell that company and just start another one. Infinite money machine. He should call it Bitcoin or NFT or something similar...
  - Scoundreller 5y ago
    People will throw money at a company that has done nothing solely based on the people behind it. I mean, people throw their money at companies that actively burn money with unlikely prospects of overcoming their death spiral. One that hasn’t even started should at least be worth much much more than those.
- ajju 5y ago
  If, at the moment of formation, the company has a binding agreement with Elon Musk (the founder) requiring their services for a fixed time allocation and at a fixed rate of remuneratin, then yes that contract has value and therefore the company has value. The value will depend on the remuneration to Mr. Musk vs the perceived value of his services. Even so, it would be as one of a small % of outliers with high-value founders amongst the millions of companies incorporated every year. Was Peter Thiel as valued when he started paypal as he is now? No. More importantly, acknowleding that very few companies may have value at inception due to the value (and commitment) of their founders' time doesn't make it any easier to systematically value that time. To legally enforce this, you would have to have valuation and audit service providers who do this - creating a bureaucratic hurde that every founder - famous or not has to go through - just to start a company. It is my opinion that the cost of doing this - in reducing or slowing down the number of companies started and the lost taxes as a result - would significanty outweigh any gain in taxes from taxing the notional value of Elon Musks's presence as part of his own company. All laws that apply to humans, particular compliance related laws, have significant second order effects. The second order effect of taxing the popularity of folks when they start a company is that thousands of less rich, less popular, less privileged, and less confident first time founders will face an additional hurdle when starting a business and they may never start one, never get rich through one. Ultimately, inequality would likely increase and rich established founders like Elon Musk and Peter Thiel would likely be more entrenched and benefit more from this, not less.

tylermenezes 5y ago

When the company is formed the valuation is genuinely very small because it has no assets, customers, etc. Buying some of your shares in a Roth IRA at this point is relatively common, enough so that I've heard multiple people suggest that founders do it.

Scoundreller 5y ago
Yeah, I doubt Thiel came up with this himself. Was probably recommended by accountants whom should all be familiar with Roth IRAs. But the possibilities of windfall tax-free profits made sure everyone kept quiet about it.

throwaway5752 5y ago

I'd guess $.001 is the par value and there was no 409A valuation. The initial basis doesn't really matter if it is essentially zero or $1 or $5 in this case. The implied current price on the founders shares is approximately $2500. I agree with Propublica's take Yet, from the start, a small number of entrepreneurs, like Thiel, made an end run around the rules: Open a Roth with $2,000 or less. Get a sweetheart deal to buy a stake in a startup that has a good chance of one day exploding in value. Pay just fractions of a penny per share, a price low enough to buy huge numbers of shares. Watch as all the gains on that stock — no matter how giant — are shielded from taxes forever, as long as the IRA remains untouched until age 59 and a half. Then use the proceeds, still inside the Roth, to make other investments. I also think that there should be a cap on tax free distributions sheltered by Roths, and they should not be transferable upon death.

marris 5y ago
I disagree with ProPublica's take. If it was as simple as "pay just fractions of a penny per share... watch as all the gains..." then we would all do it. Not just with Roth IRAs, but with our entire portfolios. The reason we don't all do this is because startups are very very risky. Some people will succeed and walk away with windfalls. Other people will lose their shirts. If there was arbitrage, there would be a an "app for that" and there would be more billionaires walking around.
- lordnacho 5y ago
  What they seem to be suggesting is that a fair valuation (well reasoned given all information) of the shares would have put the investment at millions of dollars, but due to a peculiarity of historical accounting, they could be put at worth $2K because that was the creation price and the last print. For instance, it might be that a funding round was about to happen. This is never a sure thing, so you could claim that the shares are not worth the full price (and in any case the only trade was at 2K), while privately thinking "hmm, my shares are now worth x millions". You then sell the shares to the Roth, thinking yourself that you're putting x millions in the vehicle while reporting 2K. Doesn't sound illegal to me, but it also doesn't sound like things are supposed to work this way.

woah 5y ago

Are you saying that Peter Thiel should have known that he would turn PayPal into a multibillion dollar business, and because of this, the shares were not really worthless? EDIT: That was sarcastic, but re-reading, that basically is what the article is saying: > Get a sweetheart deal to buy a stake in a startup that has a good chance of one day exploding in value. 20-20 hindsight

vmception 5y ago
it’s honestly no wonder that the masses assumes inaccessibly expensive accountants are necessary to simply think clearly

vmception 5y ago

Its still surprising to me that you got this backwards. There is no reason to ever choose a higher par value than that then when forming a company.