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Tell HN: Company returned 3X, but I (investor) may lose money

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Tell HN: Company returned 3X, but I (investor) may lose money

#1

Post by beagle3 »

[US Tax Payer here]

I invested X into the company, with a post-money valuation of Y (a minor investor). The company was bought for 3Y. Sounds good, right?

However, the deal was structured such that 1Y was paid in cash, and 2Y was paid in stock of the buying company. (1X and 2X is my respective share of the deal)

So, I got my cash back; the 2X is considered immediate ordinary income, taxed at 35% federal + 13% NYC. So, I'm 48% down on the 2X already.

Enter SEC rule 144 - I'm not allowed to sell these in the first 6 months. That might have been ok, if the buying company didn't go down some 40% since then.

So, I'm still more than break even, but not a lot more. If the company goes down (in total) more than 52% in those 6 months, I'm going to be losing money on a successful investment.

Thanks to US security and tax laws.

Re: Tell HN: Company returned 3X, but I (investor) may lose money

#2

Post by hluska »

Sorry you're going through this, but it is a great example of how certain tax and security laws create unhealthy barriers to the free market. Personally, I've never understood the logic of paying tax on stock that you receive before you dispose of it. Seems that tax policies like this do nothing but keep small investors out.

Re: Tell HN: Company returned 3X, but I (investor) may lose money

#3

Post by antimora »

hluska wrote: post #2

Sorry you're going through this, but it is a great example of how certain tax and security laws create unhealthy barriers to the free market. Personally, I've never understood the logic of paying tax on stock that you receive before you dispose of it. Seems that tax policies like this do nothing but keep small investors out.

And the sadder part is that richer investors know their way around those taxes better than new comers because they have access to accountant professionals who can advise to pay less tax.

Re: Tell HN: Company returned 3X, but I (investor) may lose money

#6

Post by ldd- »

Sounds like you're in the same boat as everyone else in your round, right? It's simply a function of the timing of the deal (less than a year since you invested, apparently) and the deal structure (cash vs. stock).

Stock inherently requires the acquired company to share the risk of the deal.

If the stock goes down further, you should be able to claim the loss on your taxes when you sell, which should mean you would need more than a 52% total decline to go in the red on the deal.

Are you an accredited investor? If not, you may have some legal outs to demand your money back, but you'd need to chat with a lawyer. If you were to pursue that route, though, you'd likely ruin any credibility to make future investments in other companies.

Kinda stinks that there's the gap between tax law and SEC regs timing, though. Good luck with the investment!

Re: Tell HN: Company returned 3X, but I (investor) may lose money

#8

Post by sa5 »

antimora wrote: post #3
hluska wrote: post #2

Sorry you're going through this, but it is a great example of how certain tax and security laws create unhealthy barriers to the free market. Personally, I've never understood the logic of paying tax on stock that you receive before you dispose of it. Seems that tax policies like this do nothing but keep small investors out.

And the sadder part is that richer investors know their way around those taxes better than new comers because they have access to accountant professionals who can advise to pay less tax.

I'm not a tax expert so this assumption may be wrong, but if the 2X is being taxed as ordinary income at 35% wouldn't that imply that beagle3 is making at least $379,150 + 2X this year? I would consider someone with that kind of income to be rich.

Also, if the stock has gone down 40% can't you claim that as a loss when you sell and lessen your overall tax burden?

Re: Tell HN: Company returned 3X, but I (investor) may lose money

#9

Post by beagle3 »

ldd- wrote: post #6

Sounds like you're in the same boat as everyone else in your round, right? It's simply a function of the timing of the deal (less than a year since you invested, apparently) and the deal structure (cash vs. stock). Stock inherently requires the acquired company to share the risk of the deal. If the stock goes down further, you should be able to claim the loss on your taxes when you sell, which should mean you would n…

> Sounds like you're in the same boat as everyone else in your round, right?

5% of the investment is accounted for by US tax payers. The rest are not, so I'm not in the same boat.

> If the stock goes down further, you should be able to claim the loss on your taxes when you sell, which should mean you would need more than a 52% total decline to go in the red on the deal.

No. The tax event is on the grant, not a capital gain (therefore capital loss does not cancel). Furthermore, if I fall under AMT (very likely), I can't deduct anything.

> Are you an accredited investor?

Yes.

Re: Tell HN: Company returned 3X, but I (investor) may lose money

#10

Post by beagle3 »

dpe82 wrote: post #7

I always thought these deals were typically done as stock swaps so it doesn't affect your capital gains?

Only if done in very specific way (google "triangular merger", there are several variations).

This deal wasn't, and I wasn't in the driver seat to make it that way.

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