#7. Taxation v. diversity
November 29, 2021
A lot has been written on the potential tax of unrealized gains, so rather than dive deep, I’ll touch on it’s frequently overlooked impacts on innovation and social mobility in America.
I run a startup where the vast majority of my compensation is in equity. That equity is worthless until a company exit (IPO or sale). Those shares become worth money on paper because private investors (VCs) agree in the value my team and I have built in the company. Take, for example, a company working in healthcare. Creating value in healthcare translates to saving lives, reducing costs, or both. If I had a big tax bill coming, it would be because I created something that saves lives or reduces costs. That’s an odd thing to tax. Furthermore, in a highly regulated and subsidized industry such as healthcare, value is generally built by displacing care that hasn’t been adequately provided by those regulations and subsidies. If I got taxed for providing care by the institutions incapable of providing that care, I’d (1) be pissed and (2) have to sell my shares to pay for the tax bill. This tax doesn't tax me for being a millionaire, it forces me to own less of my company because I've built something of value for society. That's a perverse incentive that will drive many, many people out of the innovation industry in America - either by driving them into a status quo industry or likelier driving them to innovate in another country.
Sensationalists claim this tax will end venture capital. It won’t. But a new dynamic will emerge. Founders will not want to be diluted to pay taxes, so they'll push for higher valuations to offset the ownership hit they’ll have to take. Seems simple enough, but most early-stage founders will simply not be able to command such valuations, particularly pre-revenue start-ups run by first-time founders. Those companies and founders are the ones for whom VC will die. Those companies will cease to exist. VC money will flow to serial founders who funders perceive as less risky, making the industry much more myopic. If you thought the start-up/VC boys’ club was bad now, you just wait. The bar for any “outsiders” coming into the industry will be raised to unreasonable levels simply because they lack a track record. Suddenly, the innovation economy is significantly smaller than it was before (including a likely brain drain to Europe) and it becomes something only the privileged can participate in. All because too many people were creating too much value for everybody.
