Company Founder Future Planning

Problem: Thanks to some very innovative technology, perfect timing and a great deal of very hard work, a relatively young tech entrepreneur was preparing for an exit (i.e., liquidity event) in the next year or two from the company he had helped build. In a previous company, also successful, a lack of tax planning resulted in missed opportunities – he did not want to make the same mistake twice.

So, what to consider this time around?

While a great exit is the dream of everyone who launches a tech startup, it also suddenly presents individuals with a myriad of complex, high-stakes and above all, new and pressing legal and tax questions and issues. Following a referral from an investment banker, the founder retained Farella Braun + Martel to help him manage the legal and tax planning aspects of the anticipated dramatic increase in his net worth.

Solution: Our very first task was to work with our client to think strategically about the implications of a liquidity event. Farella has helped many entrepreneurs plan for their financial success and is intimately familiar with the challenges sudden wealth can present. The first challenge is often taxes.

With the founder’s primary goal to minimize taxation and to support certain family members who didn’t benefit from the upside when his first company sold, we transferred a portion of the client’s founders’ stock into a Grantor Retained Annuity Trust (GRAT). By establishing the GRAT and transferring the stock while the company was undervalued compared to what it was expected to be worth at the time of the liquidity event, the client was potentially able to transfer significantly more value more tax efficiently than had he waited until the company sold. The goal was to ensure that upon the client’s death the value of the transferred stock would not be immediately subject to an estate tax of 40% and could be used during his lifetime and beyond to support his parents, siblings, future descendants, and other beneficiaries.

Many successful founders are also interested in supporting worthy charitable causes and this client had a keen interest in starting a charitable gifting program, so a Farella exempt organization attorney was tasked with creating a private foundation that the client could fund in advance of the liquidity event to generate an income tax charitable deduction in what would be a high-earning year and then use to make charitable grants in the future, following the liquidity event.

Founders also often want to do it again – start another company, make venture investments and so on. They tend to love the game and want to keep playing. Given this particular client was satisfied he would have more than enough wealth to outlast his life, we created a generation-skipping trust, or GST, “dynasty” type trust that could be used by the client to make investments that may dramatically increase in value, but won’t be subject to estate tax when he or the trust beneficiaries pass.

Finally, thanks to our long experience in working with high net-worth individuals to preserve and protect their wealth, our attorneys often advise on personal activities that may introduce unacceptable risk or may compromise privacy. The latter is particularly important for the newly-wealthy. This can include anything from privacy planning to masking the ownership of aircraft and homes to putting legal structures in place to minimize risk and liability arising from, say, a trip to Burning Man.

There’s an old saying attributed to Oscar Wilde that can apply to successful entrepreneurs. He said that there are two tragedies in life – not getting what you want, and getting it. Our unique skill is that in the event of the latter, we ensure that with respect to our clients, Mr. Wilde is proven wrong.