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Comment by jjmarr | Hacker News Reader

The paper spots that this pseudo-wealth tax would be better for more founders.

> Moving from current realization-based to accrual-based taxation would reduce founder ownership at exit by 25% on average but would also increase the fraction receiving positive payoffs from 16% to 47% when tax credits are refunded.

Founders would use VC money to pay the tax and get a refund if the startup fails, since the capital gains were never realized. Therefore "pre-paying" capital gains would be a good thing for most founders since otherwise a liquidity event wouldn't happen for 84% of them.

This only happens with a tax on unrealized capital gains, though, not a normal wealth tax.

Another corollary is that "zombie startups" would be heavily discouraged, since "failing fast" could result in a payout.

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It is basically forcing them to dilute more, which is better for them on average because the shares expire worthless so often anyway.

That said a higher percentage of positive outcomes does not mean much when the majority of significant wealth is in that small percentage of high value firms founded.

That's how progressive taxes work? It's generally considered a better outcome when the taxes are paid by people who can more easily afford them.

> It is basically forcing them to dilute more, which is better for them on average because the shares expire worthless so often anyway.

Well no, because VCs might not give you money to buy chunks of the business as they want the money to go into the business.

An unrealized capital gains tax forces VCs to give founders money during funding rounds to cover taxes, money that is refunded to the founder in the event of the business going under.

This means you no longer lose everything in an unsuccessful exit, because you get a refund on the capital gains that you didn't end up having.

This is assuming no reaction from people to this tax going into effect. And that's of course stupid. This is trivial to game and for that reason it will rapidly turn into a money pit for the tax agency.

After all, it's real easy for entrepreneurs to be unsuccessful. You get some nonzero valuation by having a friend bid or give some investment and thereby set the valuation, and then you go bankrupt.

You still have to pay the tax in the first place to go bankrupt.

No, someone else has to pay the tax in the first place. Am I reading it wrong?

The money comes from investors, goes to the tax agency, and comes back again. (Or maybe it doesn’t if it’s just a credit towards future taxes?)

This scheme depends on winning the trust of investors and then defrauding them. Sure, it can be done, but there are other ways. The simplest would be paying yourself a higher salary.

Presumably, investors are aware of the risks and are willing to take them.

Sounds like when I have a major tax bill, me and some friends should found a startup with poor prospects for success

Whoever plays the part of the investor would be paying your taxes. It might be difficult to get someone to do that?

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