19 Jun 2018
Tax Implications on a Start-up Company and VC
“Do not follow where the path may lead.
Go instead where there is no path and leave a trail”
RALPH WALDO EMERSON (Guy Kawasaki & Peg Fitzpatrick: The Art of Social Media)
During this Artificial Intelligent era, many Venture Capitals (VC) invest in start-up companies. There are some significant tax issues and exposures starting when the VC invest until the professional or traditional VC leave the start-up or sell their shares.
Tax issues that will be raised, among others are:
1. The different Investment value and percentage of ownership
The founders of a start-up normally only have the small amount of shares and value, so if they sell it to VC then it will create significant capital gain.
2. If the company issues new shares for the VC then the percentage of ownership cannot meet the expectation of composition, especially from the founders side. Later the expectations will be reflected at the term sheet.
3. If a VC and founder are successful to build their startup company, the both shareholders can transfer their shares based on the company’s value to the new VC or Investor.
It will create a ‘huge capital gain’ tax if this transfer happened.
From tax point of view, they need to restructure the capital of a start up in a proper way. This is in order to manage tax exposure for Founders and Investors. By doing this, then they can meet the expectation without breaking any laws and regulations.
In general the start up companies will suffer loss for many years, sometime can be more than 10 years. But Founders and Investors (VC) are potential to have huge profit in the future. Managing the transactions at early stage is very recommended.
Agung Tjahjady SH, CLA, CPA, MM, BKP (Managing Partner)
Registered Tax Consultant, Advocate
+62 816 825 348
BVD Oriana User
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