Insider And Founder Of Teachable Shares Tax Optimization Secrets For Startup Founders

Insider And Founder Of Teachable Shares Tax Optimization Secrets For Startup Founders

tax startup founders

Ankur Nagpal, the founder of Teachable. Image: Teachable

Ten percent of tech startups are successful and their founders are invariably asked to share advice for those still striving and dreaming to make it big.

Ankur Nagpal, the founder of an online learning platform he reportedly sold for $250 million, plans to take his own advice with his second startup.

Teachable allows people to create online courses and share what they know. Nagpal sold the company to Hotmart in 2020 and he is now a member of the Hotmart board.

He recently founded a new company, Ocho.com, to help business owners build wealth. He also runs Vibe Capital, a venture capital fund with 100+ portfolio companies and $100M+ in assets under management.

Nagpal recently offered insight on Twitter related to personal finance things he said he would do differently now that he has launched his next startup.

He shared this tax strategy for startup founders that sounds really simple: Transfer some of your founder shares early in your company’s lifetime to trust set up for your children or family and gift some shares to family members directly, Nagpal advised in a tweet that got 286,500 views.

He explained how this could save you potentially millions of dollars.

“Transferring wealth to your family & children can be very expensive,” he tweeted. “So, instead: Set up a trust with your family as beneficiaries (and) transfer shares into the trust early on when it’s worth very little.”

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All the appreciation in value will be gift- and estate tax-free, Nagpal said.

He suggested two possible ways of setting up such a trust:

1. With a grantor retained annuity trust or GRAT. GRATs are “super common in Silicon Valley and it’s how Zuckerberg & Moskowitz (Facebook founders) were able to bypass hundreds of millions in taxes by transferring FB shares to his family,” Nagpal said. “Do this before your company is worth a lot.”

2. Alternatively, use an irrevocable non-grantor trust. “You have to appoint a 3rd party trustee here but the added benefit here is the trust serves as it’s own taxpayer … Which means the $10M exclusion you get on QSBS (stands for qualified small business stock) can be multiplied to now be worth $20M!” Nagapl said.

Nagpal then provided a quick primer on QSBS or qualified small business stock, describing it as the most important tax rule that affects startup founders, investors, employees and business owners, and the biggest tax exemption for startup founders.

QSBS allows a startup founder to pay no federal taxes on up to $10 million of gains from selling your company, he wrote, and it’s “100% worth ensuring your business is in compliance.”

“So many people I know missed out on massive tax savings since they didn’t know about this!” he said.

Here’s how QSBS works, according to Nagpal, who grew up in Oman in the Middle East. He moved to the U.S. for university and graduated from U.C. Berkeley, where he studied economics, electrical engineering and computer science from 2006 to 2010.

If you are a startup founder or startup employee who has owned their shares for five-plus years and “the company follows some rules, you pay zero federal (& potentially state) taxes on $10M when the company sells,” Nagpal said. “Wild. The rules are obviously pretty important!”

These are the rules according to Nagpal:

“1 – This applies to C-corporations only

2 – You have to buy your shares from the company directly

3 – Has to be actual shares, not options etc.

Also if 10x what you paid for your shares is more than $10M, then you get a break on that!”

Nagpal warned that you also have to be careful to not accidentally make your company ineligible for QSBS by:

“1 – Being too late, company can’t have >$50M of asset

2 – Having transactions where the company buys back shares

3 – Being in an unqualified category (google this, most startups are fine)”

So no federal taxes on $10 million. What about state tax?

Most states also give you this tax break, he said, but here are the exceptions including California, Mississippi, Alabama, Pennsylvania, New Jersey, and Puerto Rico. Hawaii and Massachusetts give you a partial break, but “Don’t move states because of QSBS!” Nagpal added.

He suggested you can multiply the benefits of QSBS by gifting shares of your startup to friends and family directly.

“If you want to be generous, it’s much more strategic to be generous before the shares appreciate in value vs after,” he said. “The $10M QSBS limit is per taxpayer so can be indefinitely multiplied”

Nagpal launched, his new company, Ocho in December 2022 to make it easier for business owners to set up and manage their own 401(k) retirement accounts. His aim is to modernize and rebrand the retirement account away from traditional providers like Charles Schwab or Fidelity, or expensive solutions like lawyers and consultants.

Ocho charges a flat $199 annual fee to help individuals start their retirement account. It takes about 10 minutes to set up and 48 hours to get final confirmation.

Nagpal said he regrets not being more knowledgeable about personal finance as a first-time startup founder.

“This time I’m transferring shares to an irrevocable trust for benefit of my family (and) gifting some of my shares to my family members,” he tweeted.