Michel Del Buono, chief investment officer of a16z Perennial, says founders' stock basis is effectively zero, so the full gain faces long-term capital gains tax that can exceed 35% depending on state.
Del Buono says wealth managers conflict when urging clients to sell everything, and most people should keep stock while engaged with the company, with some diversification for a rainy day.
Del Buono warns that nested L1, L2 and L3 secondary vehicles push buyers further from the shares and add fees like 10% or 20% carry and 5% transaction fees, so investors should be straight on the cap table.
Tax structure and vehicle diligence decide what founders keep after liquidity
Planning for a liquidity event comes down to tax and structure. A founder's basis is near zero, so trusts, stacked QSBS exemptions and a donor advised fund matter, yet the advisers who must coordinate them work in separate silos. The same discipline applies to private market access, where layers of vehicles, fees and redemption limits quietly take the return.
Takeaways
Founders face near-zero basis and heavy tax. Founders' stock basis is effectively zero, so the whole gain is taxed, about 23.8% federally and up to 35% with state tax. QSBS exempts up to $15m of proceeds, and families stack trusts to multiply it.
Siloed advisers miss trust and tax tradeoffs. Attorneys and CPAs on one side and investment advisers on the other do not understand each other's silo well enough to trade off trusts against tax-loss harvesting. Family decisions on inheritance are personal, and people stall and miss tax benefits.
Most people should keep concentrated stock. Wealth managers have a conflict when they urge clients to sell everything. Del Buono says holding the stock that created liquidity has generally kept doing well, though not always, so people engaged with the company should keep it and diversify some.
Secondary vehicles stack layers and fees. Bylaws often bar transfers to outsiders, so secondary buyers get a claim on a vehicle. Nested layers stack carry of 10% or 20% and 5% transaction fees, and paying 15 times underlying value can leave buyers unable to benefit.
Private credit redemption limits were disclosed. Some semi-liquid evergreen funds let only 5% of investors redeem each quarter, and even that is not guaranteed. Investors pulled money after finding the products more complicated than expected. BDCs differ in underwriting, so each needs separate analysis.
Alternatives suit some investors, not all. Portfolios have shifted toward alternatives, which Del Buono considers fine. A very young investor could hold 80 to 100% alternatives, while a foundation paying out 5% a year needs liquidity. Endowments cut venture because private distributions have been weak.
Tax rarely moves people alone, except at scale. Del Buono says a 10% tax saving rarely drives a move by itself. For someone with billions, though, 10% is hundreds of millions of dollars, and the UK's 40% inheritance tax could reach all of a person's wealth if expat benefits go.
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