The potential for a massive tax-free exit under the Qualified Small Business Stock (QSBS) rule often outweighs the short-term pain of double taxation from a C-Corp structure, especially for founders targeting a multi-million dollar sale.
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Successful founders prioritize cash upfront over potentially larger payouts from complex earnouts. Earnouts often underperform because founders lose control of the business's future performance, leading to dissatisfaction despite a higher on-paper valuation.
The most powerful incentive for increasing employee ownership is to make founder exits to their employees tax-free. This aligns financial self-interest with a social good, making it more profitable for a founder to sell to their team than to private equity.
After their main exit, two founders received a secondary payout structured as a promissory note. This 'bonus' was taxed as earned income at a ~50% rate, not as capital gains (~25-30%). This structuring detail cut their net proceeds in half, highlighting a critical and non-obvious tax trap in complex M&A deals.
An acquirer often prefers an asset purchase to avoid taking on a company's liabilities. However, a founder with a C-Corp can signal they will only accept a stock purchase agreement to gain the massive tax benefits from QSBS, creating powerful negotiating leverage.
Founder Aaron Galperin moved from high-tax California to no-tax Texas specifically to avoid state income tax on his company's sale. This pre-exit relocation is a crucial, often overlooked financial strategy that significantly increases a founder's net take-home pay from a liquidity event.
Taking a small amount of money off the table via a secondary sale de-risks a founder's personal finances. This financial security empowers them to reject large acquisition offers and pursue a long-term, independent vision without the pressure of life-changing personal wealth decisions.
Many founders focus on generating personal income, inadvertently creating a job they can't leave or sell. To build a true business asset, you must define an end goal (like a sale) from the beginning and structure operations, processes, and financials accordingly.
For high-growth companies, reaching a $100M ARR milestone no longer automatically triggers IPO plans. With abundant private capital, many founders now see going public as an unnecessary burden, preferring to avoid SEC reporting and gain liquidity through private growth rounds.
Don't rush to form an S-Corp. The tax savings typically don't outweigh the added costs and complexity, like running payroll, until your business is generating at least $60,000 to $80,000 in profit. Before that, a sole proprietorship or standard LLC is often more efficient.
While media often highlights the costs of being public, the valuation multiple is an overlooked benefit. A consistently growing small business can command a 20x P/E ratio, far exceeding the typical 3x cash flow multiple offered in a private equity buyout.
