The Advantages of Working at a Startup (part 1 of 3)
By Ayal Shmilovich
One of the most exciting parts about working at a startup, especially in the tech sector, is owning stock in that company and having it be acquired. Acquisitions add tremendous wealth and value to the shareholders of companies plus it is a major driver for people to work at smaller companies. For example, if I work at Google today, I could make a decent income and even get stock, but odds are, at this point, I probably won’t become rich working there. However, if I worked at a company like Honey, which PayPal just acquired for $4 billion, I would have probably made a much lower salary during my time there but made a lot more money when the company was purchased. Owning stock is the key to wealth and acquisitions are a medium by which that wealth is solidified. So, how are companies acquired and what is the best way to utilize the proceeds?
This is the simplest one to understand and the one with which you are most familiar - a larger company buys a smaller one with the cash that they have.
The benefit here is that you will receive a lump sum of money with which you can do whatever you want. Many individuals use these acquisitions to fund purchases of things that they may not have been able to afford like a home, a car, or a nice vacation. Some savvy people may reinvest their money into other businesses or investments that will continue to grow their wealth, which is difficult to find.
The downside of receiving a lump sum of cash is that your tax bill may be very high. This is especially true if you live in California, where the highest earners will pay over 37% in capital gains taxes. This makes California the second highest place on the planet for capital gains, trailing only Denmark. You may also get an alternative minimum tax (AMT) added to your taxes, which is highly complex. Nonetheless, getting a lump sum payment is still an attractive goal.
A Stock Acquisition
In this scenario, you will receive shares of the acquiring firm, sometimes in a more tax-efficient manner, which can be very beneficial to you. The stock acquisition normally occurs when a larger company doesn't have enough cash on hand to buy the other company or if their own stock valuation is very high and they can use it as premium currency.
If the acquirer is a good company, you will reap the benefits of owning a good stock that may have more upside potential. However, if the company doesn't perform as well or the market views the deal as a negative, your shares in the new company can be significantly less by the time the acquisition goes through.
Cash and Stock
Many companies will choose to do a combination of the two previously mentioned options, giving you the best (and worst) of both worlds. A good example of this was Microsoft’s acquisition of GitHub last year for $7.5 billion. Many GitHub employees received equity in Microsoft, which is up almost 50% from the date of acquisition. Those employees who held onto Microsoft stock have enjoyed even further wealth accumulations.
Microsoft is a great example of an extremely well-run company that added huge value to shareholders; however, another company may not have fared so well. Therefore, you need to evaluate what the company’s potential for the future is when deciding what to do with your company stock.
So, what do I do now?
So, now that we know how companies are acquired, what should you do with your newfound wealth? Well, there are several things that you will want to do: talk to a financial advisor; talk to your accountant; talk to your family. The next article in the series will discuss some ways whereby you can minimize your taxes and maximize your investment returns. So, stay tuned.
Ayal Shmilovich is a Financial Advisor of Santa Monica, Calif-based Gerber Kawasaki Inc., an SEC-registered investment firm with approximately $1 billion in assets under management as of 11/27/19. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which course of action may be appropriate for you, consult your financial advisor. No strategy assures the success or protects against loss. Readers shouldn’t buy any investment without doing their own research to determine if the investments are suitable for their situation. “All investments involve risk and one should consult a financial advisor before making any investments. Past performance is not indicative of future results.”