So You Sold Your Startup for $50M – Why You Netted $19M, and How You Could Have Netted $32M

Congratulations! This is it. Every entrepreneur’s dream is now your reality. You built your business from scratch and now, after 2 years of hard work, you’ve been bought out to the tune of $50 million.

Don’t pop the champagne just yet. Somehow, your shareholders are only receiving $20 million from that $50 million sale – less than half of what your business was acquired for. What happened? Did the Brinks truck driver decide that this was his time to make a break for it down to Mexico? Did someone take a pen and some white-out and change the “5” to a “2” before your check made it to the bank?

No, it was taxes. Depending on where you live and how you negotiate the acquisition, you could end up with as little as $19.1 million of a $50 million sale, due to taxes. But if you play your cards right, you can keep as much as $31.9 million from that same sale.

It all comes down to selling your assets vs. selling your stock.

When a corporate juggernaut like Google or Microsoft goes out to acquire a startup, they do their best to acquire the assets of the company rather than the stock that belongs to the shareholders. Like many business decisions, this is because of taxes. When a company buys assets, they can write off the purchase price over the next 15 years, and they know they’re not inheriting any undisclosed liabilities. When a company buys stock, they get no tax write-off and they acquire all liabilities, known and unknown.

Naturally the acquirer wants your assets rather than your stock, but selling your assets is going to take a big bite out of your side of the sale. Sell your assets and you’ll be taxed twice: once for the gain you make from the sale, and then again when you distribute the remaining amount to the stockholders.

You’d be better off selling your stock to the acquirer, because in that case you only have to deal with a single capital gains tax.  Of course, the tension here is that the acquirer will fight for an asset-based sale, as that’s what benefits them the most.

This is an argument worth having while negotiating with your acquirer. If you’re not yet convinced, just take a look at how wide the gap between how much you make from an asset sale and how much you make from a stock sale can be:

(Note: The chart below assumes a 2-year-old startup initially received $2.5M in seed funding, spent $2M developing their product in those first 2 years, and was then acquired for $50M at the end of the second year.  It’s also a C corporation, and we did different scenarios for California, Massachusetts, and New York/NYC to illustrate how state and city taxes can be a significant factor.)

Shareholder Net
Location Sale Amount Asset Sale Stock Sale
California $50M $19.6M $31.7M
Massachusetts $50M $21.9M $35.6M
New York/NYC $50M $19.1M $31.9M

Those numbers should put it into perspective – you must do all you can to get the acquirer to buy your stock rather than your assets. It helps to manufacture some incentive for the acquirer that plays to your advantage. You may be able to convince your buyer to go the stock route if you reduce the sale price of buying your company through stock, but leave the cost of buying your company through assets at full price.

The main takeaway here is sellers, beware. Don’t let your guard down just because someone’s throwing enough money to lay down in at you. Understand the tax implications of your decisions and favor selling your stock over selling your assets, or you might make a $10 million mistake.