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How much tax will you owe when you sell your company? • ZebethMedia

By zebethcontrolPosted on November 18, 2022Posted in Column, EC Column, EC How To, qualified small business stock, Startups, tax lawsNo Comments

Peyton Carr is a financial adviser to founders, entrepreneurs and their families, helping them with planning and investing. He is a managing director of Keystone Global Partners. More posts by this contributor With a Section 1045 rollover, founders can salvage QSBS before 5 years Advanced tax strategies for startup founders When a founder sells their company, its valuation gets a lot of attention. But too much emphasis on valuation often leads to too little consideration for what stockholders and stakeholders pay in taxes post-sale. After an exit, some founders may pay a 0% tax while others pay over 50% of their sale proceeds. Some founders can walk away with as much as two times the money as other founders at the same sale price — purely due to circumstances and tax planning. Personal tax planning can ultimately impact a founder’s take-home proceeds as much as exit-level valuation changes can. How does this happen? Taxes owed will ultimately depend on the type of equity owned, how long it’s been held, where the shareholder lives, potential tax rate changes in the future and tax-planning strategies. If you’re thinking about taxes now, chances are you’re ahead in the game. But determining how much you’ll owe isn’t simple. In this article, I’ll provide a simplified overview of how founders can think about taxes as well as an easy way to estimate what they will owe in tax upon selling their company. I’ll also touch on advanced tax planning and optimization strategies, state tax and future tax risks. Of course, remember that this is not tax advice. Prior to making any tax decisions, you should consult with your CPA or tax adviser. How shareholders are taxed When it comes to minimizing capital gains tax, QSBS (qualified small business stock) can be a game-changer for people that qualify. Let’s assume you’re a founder and own equity or options in a typical venture-backed C-corp. A number of factors will determine whether you will be taxed at short-term capital gains (ordinary income tax rates) or long-term capital gains, also referred to as qualified small business stock (QSBS) rates. It’s essential to understand the differences and where you can optimize. Below is a chart summarizing different types of taxation and when each applies. I further break this down to show the combined “all in” federal + state + city taxation, if applicable. Founders with exits on the horizon that will raise more than $10 million should explore some of the advanced tax strategies I covered in one of my previous articles, since there are opportunities to multiply or “stack” the $10 million QSBS exclusion and minimize taxation further. Image Credits: Keystone Global Partners As you can see above, some of the more common levers that influence how much tax a founder owes after an exit include QSBS, trust creation, which state you live in, how long you’ve held your shares and whether you exercise your options.

How to turn user data into your next pitch deck • ZebethMedia

By zebethcontrolPosted on November 16, 2022Posted in Column, EC Column, EC How To, fundraising tactics, pitch deck, Startups, VentureNo Comments

David K Smith Contributor David Smith is VP of data and analytics at TheVentureCity, a global early-stage venture fund investing in product-centric startups across the U.S., Europe, and Latin America. Of every 100 deals a VC firm considers, about a quarter get a meeting, and only one ends up securing investment. Given the downturn in the markets leading to a startup funding squeeze, getting through the door is a critical first step. But then what? How do you prove you’re that one in 100? Well, you have one drastically overlooked superpower: your data. Many early stage startups don’t have a data team or even a data expert. They’ve been told that it looks good to have cash flowing in and user numbers ticking up. But investors are looking past superficial metrics for indicators that your product is poised to grow years into the future. There’s no one metric for that, which is why you need to know exactly which ones to focus on, and what they tell others about your product’s growth prospects. If possible, collect the most granular, user-level data you can: events and transactions. Having this data allows you to X-Ray how people are interacting with your product. Visualizing and communicating this data can definitively power up a pitch deck. If you’re a founder of a new SaaS, fintech, marketplace, or consumer subscription product, here’s what you should be showing investors at the early stages of your journey. Investors need to see that you’re not being blindsided by easy wins that can go up in smoke within weeks, but are using hard data to build a sustainable company. At all stages: Focus on active usage, not vanity metrics If you haven’t been thinking about product-market fit, you don’t have a pitch. Now, that doesn’t mean you have to prove you have product-market fit, but you absolutely need to show investors that you’ve been working towards it. If investors can’t tell where you are in your lifecycle, they have no way of telling how close you are to getting real traction — and getting them their returns. Product-market fit isn’t a defined point. It’s more about reading the right signals: You have to know which metrics to look at and how to measure their strength. The stronger the signals related to user engagement and retention — all measured in different ways and all trending positively — the more evidence you have that you’ve reached, or are reaching, product-market fit. Building up all that evidence through data helps bolster a pitch and increases your odds of landing an investment.

5 sustainable best practices for bootstrapped startups • ZebethMedia

By zebethcontrolPosted on November 15, 2022Posted in bootstrapping, Column, EC Column, EC How To, startup hiring, StartupsNo Comments

Marjorie Radlo-Zandi Contributor Marjorie Radlo-Zandi is an entrepreneur, board member, mentor to startups and angel investor who shows early-stage businesses how to build and successfully scale their businesses. More posts by this contributor You’ve sold your company. Now what? The art of the pivot: Work closely with investors to improve your odds No matter how successful your startup is, you’ll always need to pay bills and ensure healthy future cash flows. Times of plenty can lull you into thinking funds will always flow into your bank account, because that’s been your reality so far, but the cruel reality is that capital sources can dry up overnight with no warning. To weather uncertainty and maintain emotional equilibrium, it’s good to temper your exuberance and confidence with a dose of realism. One way to do this is through bootstrapping. Bootstrapping is a double-edged sword: Because you have little or no dependence on investors or stakeholders, you won’t give up much of your company in exchange for money, but the downside is that you have less money to invest in growth. There’s also a hybrid model that gets less attention and bears mentioning. An investment colleague of mine in the life science genomics space received $150,000 in angel funding. She later sold her business for hundreds of millions of dollars. She could pull off this extraordinarily successful exit because after the initial angel round, sales of her unique DNA sequencing and genomic services funded the business. With the success of her technology, she was able to rapidly scale the business within the U.S. If you decide bootstrapping is the best choice for your situation, you should first figure out if you’ll self-fund or seek small amounts from angels. Don’t be tempted to hop on a plane at a moment’s notice to meet potential customers in glamorous locations or for meetings in far-flung locations. These five key business strategies and principles will set you up for success: Pick team members wisely Establish your business model and go-to -market strategy to generate cash quickly Adopt a frugal mindset: always watch expenses and negotiate costs Be prepared to take on many roles, including those you feel are menial. Only outsource what’s absolutely essential, such as legal and accounting Pick your team wisely Your first employees are among the most important stakeholders in your business. It’s critical to select people who are invested in the mission and success of your business. They should want to work for a bootstrapped business, as not all will. Look for people who want to be part of the business rather than someone for whom it’s just another job. The right hires will indicate they want to be part of a sustainable business model. You should offer equity vesting over time as a key financial incentive. Because your team will earn this incentive over their tenure with the company, each individual will likely be even more invested in your business’ success. Select employees who can wear many hats, and seek out talent from diverse backgrounds to bring in varied perspectives. I built and ran a startup in food safety diagnostics that I sold to a multi-billion dollar S&P 500 company. We had people across ages, sexes, ethnic backgrounds, education, and geographies. This diversity was critical to our success, because we were doing business in 100 countries. It required us to have a deep understanding of the marketplace and cultural dynamics of each country.

Use IRS Code Section 1202 to sell your multi-million dollar startup tax-free • ZebethMedia

By zebethcontrolPosted on November 10, 2022Posted in Column, EC Column, EC How To, income tax, Startups, tax breaks, Tax law, VentureNo Comments

Vincent Aiello Contributor Spencer Fane attorney and business owner Vincent Aiello helps businesses solve legal problems to secure revenue flow and reduce business risks. Whoever said you can’t have your cake and eat it too should have called their accountants and lawyers first. These professionals often receive inquiries from founders, equity investment firms and venture capitalists looking for ways to save on or avoid capital gains taxes on future business sales. Both lawyers and accountants encourage clients to examine the tax savings offered by setting up a Qualified Small Business (QSB) C-Corporation at the initial business formation stage. Using a QSB can eliminate capital gains tax due on the future business sale if the company is established and stock issued pursuant to Internal Revenue Code Section 1202. Many startups often simply default to a robotic use of S-Corporations, partnerships, and LLCs, but savvy tech founders should consider the excellent long-term tax savings afforded by IRS Code Section 1202. This article provides a general overview concerning the major requirements and tax savings provided by forming a startup entity structured to maximize the capital gains tax exclusion in IRC 1202. IRC 1202 excludes capital gains tax realized on the sale of qualified small business stock (QSBS) of non-corporate taxpayers if the stock has been held for more than five years. QSBS is stock in a C-Corporation originally issued after August 10, 1993, and acquired by the taxpayer in exchange for money, property or as compensation for services. The corporation may not have gross assets in excess of $50 million in fair market value at the time the stock is issued. The IRC 1202 gain exclusion allows stockholders, founders, private equity and venture capitalists to claim a minimum $10 million federal income tax exclusion on capital gains for the sale of QSBS. Prior to 2010, only part of the capital gain on QSBS was excluded from taxable gain under section 1202 and the portion excluded from gain was an item of tax preference subject to alternative minimum tax. This rule was changed for stock acquired after September 27, 2010, and before January 1, 2015, such that the gain on such stock was fully excluded and no portion of the gain was an item of tax preference. This change was made permanent by the Protecting Americans from Tax Hikes Act of 2015, signed into law on December 18, 2015. Given the changes to IRC 1202, it constitutes a significant tax savings benefit for entrepreneurs and small business investors. However, the effect of the exclusion ultimately depends on when the stock was acquired, the trade or business being operated, and various other factors. Qualifying for Section 1202’s capital gains tax exclusion takes careful planning The critical plan to be determined at the outset is the future stock sale, which must be structured as a sale of QSBS for federal income tax purposes to achieve capital gains tax exclusion. This can be a challenge, as buyers typically prefer asset acquisitions permitting a step-up in basis and future goodwill amortization. In many business sales today, buyers expect stockholders to roll over a portion of their equity, or receive stock or membership interests in a new entity as part of the transaction. Imprecise planning will cause the QSB stockholders to forfeit the QSBS gain exclusion and owe tax on the sale. This can happen if there is an impermissible equity rollover to an LP, or receipt of LLC equity.

3 tips for managing a remote engineering team • ZebethMedia

By zebethcontrolPosted on November 9, 2022Posted in Column, EC Column, EC Future of Work, EC How To, remote work, remote working, StartupsNo Comments

Kuan Wei (Greg) Soh is a technology entrepreneur and angel investor who enjoys building world-class technology teams. Previously, he worked in financial services, the hedge fund industry and at high-growth startups. Remote work is not for every business and it may not be everyone’s cup of tea. When my co-founder and I decided to build a distributed engineering team for our startup, numerous questions raced through our minds: Will they be productive? How will decisions be made? How do we keep the culture alive? Today, we manage a remote team of about a dozen engineers, and we’ve learned quite a bit along the way. Here are some tips we hope you find effective. These are probably applicable to earlier-stage startups and less so for larger organizations. Pair programming In an office setting, employees have ample opportunities to interact with colleagues, and these conversations organically create a sense of authenticity. But in a remote work setting, there is no such privilege. Some of our founder friends have used services to monitor or micromanage their employees during work hours, but we feel this is unproductive and antithetical to building a positive culture. The introduction of pair programming, an agile software development technique where two engineers simultaneously work on the same issue, fosters collaboration and creates opportunities for developers to have conversations as they would in an office pantry. We try to pair two programmers for a sustained period of time (about 10 weeks) before considering a rotation or switch. Some may argue that pair programming is a waste of time on the basis that if each individual can produce X output, then it makes sense to produce twice that output by having each of them work on separate problems. We find this view limiting. Firstly, pair programming results in higher quality, since two brains are generally better than one. When engineering systems are incredibly complex, having a thoughtful “sanity checker” is almost always a good idea, as this prevents mediocre decisions and helps thwart downstream problems, which can be time-consuming to resolve in the future. In my experience, it also leads to faster problem resolutions. To elucidate this point, if problems can be solved in half the time, then in the same time frame, the output of two programmers working as a pair will still be 2x.

Here’s what founders and executives need to focus on • ZebethMedia

By zebethcontrolPosted on November 8, 2022Posted in Column, downturn, EC Column, EC How To, Mergers and Acquisitions, StartupsNo Comments

Matt Armanino Contributor Matt Armanino serves as the CEO of national consulting and accounting firm Armanino, where he focuses on driving firmwide growth and innovation. Recent economic headlines have been dominated by the declining stock market, rampant inflation and widespread talk of recession. At Armanino, we use the term “VUCA” to describe such broadly adverse market conditions. Standing for volatility, uncertainty, complexity and ambiguity, VUCA illustrates the many challenges currently facing business owners and operators. Times like these can separate well-run companies from those with directional or operational flaws. Forward-looking owners and C-suite executives who provide strong direction are more likely to steer their companies through the storm. Facing a sea of challenges, leaders have clear opportunities to implement critical changes and prepare for better times ahead. As a business owner and CEO, anticipating and managing through VUCA is a constant focus for me. We have helped thousands of companies — ranging from seed-round startups and late-stage unicorns to mature public companies — navigate it by implementing practices that can allow them to survive and thrive. Having helped build a startup and gone under the hood with many unicorns over the past few decades, I’ve seen how some of the best founders and executives position their companies in times of stress to flourish on the other side, whether through a successful IPO, SPAC exit or just stable growth. It might seem counterintuitive, but the ability of AI to assess the quality of client relationships can actually help companies become more “human.” As I look back on what these businesses have done to succeed, my best tips for company leaders encountering VUCA now are to empower their operations, invest in digital transformation and seek M&A opportunities. Empower operations to capitalize on better market conditions in the future Companies are increasingly focused on running their businesses better during adverse market conditions so they can come out stronger when the economic environment improves. In some cases, companies that had been targeting IPOs or funding transactions for 2022 are now postponing until Q1 or Q2 of 2023, if not later. Empowering operations includes understanding and communicating relevant metrics. First, does your team grasp the metrics on which success is based for your company? Second, do your employees understand those numbers and how to impact them? When times are tough, everyone in the organization should understand the most important metrics and how to potentially improve them so they can better recognize what to do and why their roles matter. We’ve also noticed companies increasingly emphasizing the idea of reaching a cash-flow-positive state. In the past, a “revenue at all costs” approach often took precedence. But now it’s more about identifying the best revenue and focusing on how to manage costs to achieve some level of cash-flow positivity or at least a clear trajectory toward it. During lucrative times, companies have historically focused on growing top-line revenue by aggressively adding new accounts. During a downturn, it’s critical to be laser-focused on your most engaged customers and invest in building deeper relationships with less steady clients. Businesses should take a closer look at key accounts to analyze relationship strength and work to bolster these relationships. In fact, many companies are now hiring more account managers instead of salespeople to improve client relations and promote additional services to paying customers. Invest in digital transformation to make your data actionable If becoming cash-flow positive and developing deeper client relationships are important goals, then focusing on technology and digital transformation is vital. Businesses need to assess how they can become more efficient with their infrastructure and leverage more valuable information from their data collection.

What investors really think about the TAM slide in your pitch deck • ZebethMedia

By zebethcontrolPosted on November 4, 2022Posted in EC How To, EC TechCrunch Disrupt 2022, startup fundraising, Startups, TechCrunch Disrupt 2022, Total Addressable Market, VentureNo Comments

We’re encouraged to think of pitch meetings as a trial by fire: If an entrepreneur can negotiate deadly traps and slay the doubt monsters that bedevil tech investors, they’ll be rewarded with a golden SAFE note at the end of their quest. Particularly for first-timers, the pitch has become an existential drama, which can lead to poor decisions like overlong slide decks, failing to prepare investors before a meeting, and fatally, exaggerating the size of the total addressable market (TAM) in which they hope to compete. “With TAM, it is almost guaranteed you’re going to be wrong,” Aydin Senkut, the founder and managing partner of Felicis Ventures, said at ZebethMedia Disrupt. “It’s either going to be too large or too small.” Kara Nortman, a managing partner at Upfront Ventures, said the TAM numbers given in a pitch do not control whether she’s likely to invest. “I would say [it is] more important to be able to articulate how big something can become and to show that you have a thought process around TAM, if it’s early.” According to Deena Shakir, a partner at Lux Capital, TAM, along with the associated metrics serviceable addressable market (SAM) and serviceable obtainable market (SOM), aren’t meant to be carved in stone. They’re simple planning tools that help founders show investors their company’s upside potential, while SOM and SAM help them offset risk. “If we’re taking the meeting, we all sensibly think there’s something there that’s interesting enough to be potentially venture-bankable,” she said. “The way it’s calculated and the way the founder is thinking about it tells us not necessarily about the business or its future, but about how the founder thinks about company creation. And that’s much more important at the earliest stage.” All three panelists said TAM, SAM and SOM numbers offer a window into a founder’s mindset, but they’re not determinative factors, since they already have a general understanding of the sectors in which founders hope to compete.

Tips for e-commerce startups that want to win market share this holiday season • ZebethMedia

By zebethcontrolPosted on November 3, 2022Posted in black friday, Column, Commerce, EC Column, EC Ecommerce and D2C, EC How To, holiday shopping, StartupsNo Comments

Guru Hariharan Contributor Guru Hariharan is CEO and founder of CommerceIQ, an e-commerce management company. For consumers, the holiday season means indulging in gifts, family traditions and festive celebrations. But for retail businesses, it’s the most critical time of the year. We’re seeing a gathering storm of economic conditions — inflation, inventory and supply chain issues, and an elongated holiday season — that has companies scrambling to determine the right e-commerce strategy for the holiday season. Retail e-commerce channels such as Amazon, Walmart and Instacart, where a majority of all e-commerce happens, will be the real holiday battlefront. The key to succeed this year will be flexibility, responsiveness and endurance: Companies will have to be ready to respond to the market and the consumer throughout the season. Following two years when e-commerce enjoyed pandemic tailwinds, consumers are now living with inflation and an unofficial recession, and we can expect more selective and price-conscious shopping behavior. While prices across major retail e-commerce marketplaces like Amazon, Walmart and Target have mostly kept pace with inflation, consumers are feeling the squeeze on their everyday essential purchases. According to CommerceIQ data based on thousands of products across 450+ online retailers, grocery and home and kitchen prices have risen about 20% on average over last year, far outpacing inflation. The average shopper has to focus more of their budget on essentials, leaving them less to spend on gifts and other discretionary purchases. Place as many inventory orders as possible early so that you have inventory before the holiday season begins. However, unemployment has remained low so far, and consumer spending has been resilient, which we can see in the continued strength of online shopping. For instance, in Q2 2022, e-commerce growth has already rebounded to 9% at Target, 12% at Walmart and 10% at Amazon in North America. On top of this shift in value, the holiday shopping season is kicking off earlier this year, spurred by the second Amazon Prime Day in October. Other retailers will follow suit in an attempt to capture the spending of price-conscious consumers as they plan ahead for the holidays. What does this mean for brands? The focus must be on endurance and companies will need to be ready to shift their strategy for discounting, inventory planning and ad and marketing spend as the environment changes, all while fending off potential consumer fatigue. Increase discounts while balancing profitability Discounting has taken a back seat over the past couple of years, largely thanks to consumers’ lockdown savings and stimulus checks, but that is set to change this year. Promotions and discounts have been on the rise throughout 2022, and Amazon Prime Day was a great indicator of what could come in the holiday season. According to CommerceIQ data, during Prime Day 2022, discount levels for items on sale rose 10% to 12% compared to Prime Day 2021. The trend will likely continue at other major retailers as we head into the holidays. While companies and retailers will look to increase promotions and discounts throughout the season, the majority of promotions will still occur during specific sales like Black Friday and Cyber Monday rather than broadly across the season as consumers hold out for the best deals. There is an opportunity to further eventize promotional events like Cyber Week to capture greater volume, but getting discount levels wrong could lead to big hits to profitability. Companies that go into the season with excess inventory could face a perfect storm that eats into the bottom line. Prices continue to rise leading into 2022 holidays, but discounts have yet to pick up. Image Credits: CommerceIQ Here are some principles companies should keep in mind when planning e-commerce promotional strategies for the holiday season:

6 key metrics that can help SaaS startups outlast this downturn • ZebethMedia

By zebethcontrolPosted on November 3, 2022Posted in Column, EC Cloud and Enterprise Infrastructure, EC Column, EC How To, Enterprise, enterprise saas, growth tactics, SaaS management, StartupsNo Comments

Sudheesh Nair Contributor Sudheesh Nair is CEO of ThoughtSpot, a business intelligence company that has built an intuitive Google-like interface for data analytics. Before ThoughtSpot, Sudheesh was president at Nutanix. More posts by this contributor A blueprint for building a great startup founding team With the economy slowing and businesses tightening their belts, the coming months will be make or break for many startups. Business is shifting from a “growth at all costs” mindset to one that is more measured. This means leaders need to know where to conserve cash, where to target spend effectively and which customers are at risk of churn so they can take proactive steps accordingly. SaaS companies are in a better position than most because they have access to the data that can guide these decisions. They inherently know not only that a customer bought a product, but who is using it, how they’re using it and how often. Management teams should pay close attention to this data for signs of changing customer behavior and watch their sales pipeline for clues about where to target spend and where to cut costs. At a high level, leaders need to understand — before it becomes obvious — if the slowdown this year is affecting demand at their company and where that’s happening. The goal is to pick up on warning signs early and course-correct as you go, and those signs are often hidden in the breadcrumbs. Do you know what your customers are thinking? Not all industries are affected equally, so don’t assume your customers will cut spending this year just because the headlines are bleak. When thinking about metrics for SaaS companies, it’s helpful to look at how current customers are using your product so you can identify areas of concern and take action. You should also read the tea leaves in your pipeline to understand where to cut back and where to invest. Every CFO is looking closely at contracts to evaluate areas for cost-cutting. Only those technologies offering real value will survive, so SaaS vendors need to get ahead of this. Traditional customer satisfaction metrics like NPS are a lagging indicator and will not help you respond quickly enough. Instead, look at the following areas to be more proactive: How much are customers using your product? You can measure usage trends with points of access, number of registered users, volume of queries or some other metric depending on your product. The point is, as a SaaS company, you should not have to guess who is using your product, when, why, how much and if that’s changing. Say you have a customer that logs in and uses your product 10 times a day, and that number hasn’t increased over the last year. It’s a sign they are not adding new use cases and creating new value.

5 ways biotech startups can mitigate risk to grow sustainably in the long run • ZebethMedia

By zebethcontrolPosted on October 28, 2022Posted in Biotech & Health, biotech startups, Column, EC Column, EC Digital Biotech, EC How To, fundraising, Startups, VentureNo Comments

Omar Khalil is a partner at Santé Ventures, where he focuses primarily on biotechnology and medical technology companies. The unprecedented explosion of investment in life sciences over the past decade has resulted in incredible new therapies for patients, strong financial returns for companies and an overall increase in translational research, which is critical to advancing the next generation of therapies. It has also led to eye-popping levels of capital raised by early-stage companies, some of which were years away from entering the clinic with their first product. Naturally, a generous flow of financing generates excitement for everyone involved. Capital is the fuel that advances scientific and technological innovation, and it means a life science startup can create products that benefit the world at large. But what happens when the funding suddenly dries up? In the world of biotech, for example, it’s extremely capital intensive to develop multiple products that are all going through clinical trials simultaneously. The infrastructure needed to maintain these different programs can be too unwieldy to weather a financial drought. A better approach would be to focus on a lead program — a single product that they can take through various stages of development, ultimately leading to FDA approval. In fact, lead programs validate the value of an underlying platform, enabling companies to raise capital through licensing and partnerships. Founders shouldn’t let peer pressure or investor check size mandates dictate their financing strategy. There will always be ebbs and flows in funding, so here are five ways life science startups can optimize for success regardless of the economic climate. Don’t confuse successful fundraising with a successful company At the end of the day, fundraising is a means to an end. The mission for most life science startups is to improve patient outcomes. However, science is hard, and cash in the bank does not overcome the complexities of human biology. Plenty of companies have successfully raised significant amounts of capital but were never successful in developing a beneficial product, therapy or technology. While not a perfect proxy, the value at which a venture-backed company exits (through M&A or IPO) can be an indication of its success in developing a new product. However, there is practically no correlation between the amount of capital a company raises and its ultimate exit value. Since 2010, the R-squared between exit value and total invested capital — a measure of how correlated the two variables are — for all healthcare exits is a paltry 0.34. When you drill down to a correlation between the exit value and the amount of capital raised in a company’s Series A financing, it drops to a practically negligible value of 0.05, according to PitchBook. These statistics support the notion that just because a company raises significant amounts of capital (especially early on), there is no guarantee of a successful investment outcome. Founders shouldn’t let peer pressure or investor check size mandates dictate their financing strategy. Instead, focus on advancing your program through the key stages of technical and clinical development.