Bloomberg Businessweek - USA (2019-06-17)

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◼ FINANCE Bloomberg Businessweek June 17, 2019

● Theimage of the finance industry

hasplummeted since the crisis

Why the Dutch

Hate Bankers

TheNetherlands is the cradle of capitalism—the

homeof the world’s first stock market and the dom-

inantglobal financial center in the 17th and 18th cen-

turies.Its banking sector was the first to introduce

innovations such as international trade finance and

underwriting of bonds issued by foreign govern-

ments. And its banks today are among the European

Union’s safest, most profitable, and most digitally

savvy.SowhydotheDutchhatebankerssomuch?

A 2018surveybyresearcherNIMfoundthat

DutchpeoplehaveEurope’shighest level of trust

inlawyers, doctors, and other professionals,

butthey’re tied for second-lowest in their feel-

ingstoward bankers. The Netherlands is a hot-

bedof measured moderation—it lacks France’s

fierceunions, Britain’s sensationalist tabloids,

andItaly’s string of failed governments—but

Dutchbankers face Europe’s toughest restrictions

onpay, profits, and practices. When ING Groep

NV,the country’s largest lender, approached

Germany’s Commerzbank AG about a possible

takeover this spring, it offered to move its head-

quarters to Frankfurt as part of the deal, according

tolocal media reports. “The Netherlands is an

THEBOTTOMLINE TheQSBStaxbreakwasa little-knownpart

ofthetax code, until it became clear that it could be used to avoid

taxesonmillions of dollars of investor gains on tech startups.

theprimebeneficiary.Venture-backedcompa-
niestendtobeC-corporations,andinthepast
decadehundredsoftechstartupshaveseenthe
sortofrapidgrowththatmakesQSBSsolucrative.
Lobbyistsfortheindustrydefendtheprovision.
“FolksaredoingquitewellatsomeoftheseIPOs,
butthey’recreatingrealvalueintheeconomy,”says
JustinField,seniorvicepresidentforgovernment
affairsattheNationalVentureCapitalAssociation.
QSBShelpsbringfundingtostartups“ata much
morevulnerablepointintheircycle,”hesays.
Gettingearlysharesis thekey,beforea company
hits$50millioningrossassets.That’snotalwaysan
obviousmoment,becauseasanaccountingmea-
sure,grossassetsaredistinctfrommarketvalua-
tion.Uber,foundedin 2009 asUberCab,didn’thit
thatmarkuntilthemiddleof2013.Bythatpoint,
IPOfilingsshow,thecompanyhadissuedmorethan
425 millionshares,nowvaluedatabout$19billion,
whichcouldbeeligiblefortheQSBSbenefit.
Withtherightmoves,investorscansuper-
sizetheirbenefit. Onestrategyistocarefully
timestocksalesovera coupleofyears.Aninves-
torcantakeadvantageofboththe$10millionand
the10-times-basisexclusionsif they’reclaimedin
separatecalendaryears.Thatway,someonewho
invested$2millionina startup,forexample,could
paynotaxeswhileselling$30millionofstock.
Thebadnewsformanytechbillionairesis they
maystilloweCaliforniataxes.ThehomeofSilicon
Valley,whichtaxesitsrichestresidentsatratesas
highas13.3%,is oneofjusta fewstatesthatdoesn’t
recognizeQSBS.Inmostofthecountry,QSBSwill
excludebothfederalandstatetaxes.
QSBShasbeenonthebookssince1993.Initially,
onlyhalfofa QSBSgainwasprotectedfromtax.
BarackObamafloatedtheideaofexpandingQSBS
whilestilla presidentialcandidateasthefinancial
crisisdeepenedinOctober2008. The Democratic
majority in Congress elected along with Obama
agreed. By 2010, a temporary provision made 100%
of the gains tax-free. “All of a sudden, it got more
interesting,” says Megan Lisa Jones, a tax attorney
at Withersworldwide.
A Republican-led Congress made the benefit
permanent in 2015. It took a while for even many
accountants to realize what QSBS could do. “It
wasn’t until 2015 that people started to care about
it,” says Christopher Karachale, a partner at law
firm Hanson Bridgett in San Francisco. “I’ve looked
at 2016 tax returns where the accountant blew it.”
But accountants and tax advisers quickly caught
on. Startups began writing QSBS provisions into
their investor agreements, promising to provide
proof that their shares were issued before the

$50millionthreshold.Lyft’sinvestoragreement,

disclosedinitsIPOfilings,makesthispromiseto

holdersofseriesA andB stock.

Whileventureinvestorsandfounders,who

canaffordtop-notchtaxadvice,areusingQSBS,

techworkersmightnotbeaslucky.Therulesare

complicated,andit canbeeasytomissout.For

example,earlyemployeesneededtohaveexer-

cisedoptionswhentheirstartup’sassetswerestill

under$50million. “If you planned well, you ended

up with a phenomenal result,” says Mary Russell,

an attorney at Stock Option Counsel in Palo Alto,

Calif., who advises tech employees on their com-

pensation. “If you didn’t, you were in a really tight,

messy spot.” �Ben Steverman

● Estimated tax

revenue lost from the

break for individuals

claiming gains on small

business stock

2008 2019

$1.0b

0.5

0