Why I told my friend not to take $67 million in cash.
If you own a business, you should read this.
A friend of mine is selling his company to a public company right now, and he almost handed the government $25 million of his $67 million payout without realizing it.
The investment bankers gave him two choices:
Cash + Earn out
Stock (of the fancy public company that’s buying him)
Of course he wanted to the cash.
He just had a dream of seeing 8 figures in his bank account.
When he called me about it, I explained to him why he should consider the stock choice as well.
First, there are taxes
When you take cash from a sale like this, the IRS treats it as a taxable event on the spot. My friend lives in California, which makes this particularly painful. Here is what the tax stack looks like on a $67 million cash payout in California:
Federal long-term capital gains tax: 20%
Net Investment Income Tax: 3.8%
California state tax (California taxes capital gains as ordinary income): 13.3%
Total effective rate: roughly 37.1%
Dollar amount lost on day one: approximately $24.8 million
He walks away from the closing table with about $42 million instead of $67 million, before he spends a single dollar.
But wait, there’s more:
Every time that $42 million earns interest or gets reinvested, California and the IRS tax those earnings again.
And when he eventually passes that money to his kids, anything above the $15 million federal estate tax exemption gets hit with another 40% federal estate tax rate.
Let’s be real for a second… its $42 million and it is life changing money as long as your last name is not Musk, Gates, Rockefeller, or Bezos. But it is also important to know that the the cash option is not always a clean win. In fact, it is a long series of tax events, one after another, for the rest of his life.
Let’s consider the all-stock choice
I am not a CPA or a tax attorney, I just read the tax code a lot. A section of the tax code called Section 368 may just give my friend the unfair advantage here.
Here is how it works:
Under this rule, when you trade your shares in your company for shares in the company buying you, the IRS does not count it as a sale.
You are exchanging, not selling. No tax is due at closing. Your original cost basis, meaning what you originally paid for your shares, carries over into the new stock.
The gain from all those years of building sits there waiting, but it does not get taxed until you actually sell the new shares.
My friend now has $67 million in stock in a (fancy) publicly traded company and a $0 tax bill on closing day.
That feels like a win… now what?
The Three-Part Architecture I asked him to consider
Once you have this stock, you gotta get it to work for you.
Part 1: Take 100% stock at closing. If the deal is 100% stock, 100% of the gain defers. If you take any cash alongside the stock, the IRS taxes that cash portion immediately. That cash component is called “boot.” You could negotiate for all stock and avoid the boot entirely if you can.
Part 2: Borrow against the stock instead of selling it. Most stock deals have restrictions on the shares or lockup periods. Once the lock-up period ends, you pledge your stock as collateral at a private bank or brokerage and pull out a line of credit against it.
On $67 million of public company stock, most private banks will lend 50 to 70% of the position’s value, which works out to roughly $33 to $47 million in accessible cash.
You pay interest on what you borrow, but you never sell a share.
The IRS only taxes sales. A loan against stock you still own is not a sale, so no tax is triggered. You live off the borrowed money while the stock keeps growing in the background.
Oh, and based on a few minor technicalities the interest you owe on borrowing against your stock is an expense, and therefore tax deductible.
Part 3: Collar the position to protect against a big drop. This is just a fancy way of saying… you do some financial engineering to protect your stock from going down.
A collar means you buy a put option and sell a call option at the same time.
A put option is a contract that pays you if the stock price falls sharply below a set level.
A call option is a contract where you agree to cap your upside above a certain price, and selling it generates income that offsets the cost of the put.
Together they create a price floor and a price ceiling around your stock position, which lets you hold the stock without worrying that it could collapse in value.
Just to be super clear… this is a very common thing in situations like this and a simple chat with your favorite LLM will draw out how you should do this.
The Technicality
Someone is going to hate on me, so here is the technicality.
The IRS watches collars carefully under a rule called the constructive sale rule, Section 1259.
If the collar is too tight, meaning the floor and ceiling are too close to the current stock price, the IRS decides you have essentially sold the stock without actually selling it and taxes you immediately as if you did.
To stay outside that ruling, the floor typically needs to be set at least 20 to 30 percent below the current stock price.
When this is done correctly, you hold the stock, maintain your borrowing capacity, and have real protection if the market turns against you.
There haters, feel better?
What Happens to the Tax Bill When You Die?
This is kinda the entire flex in all of this…
If my friend holds this stock and passes it to his kids, the IRS resets the cost basis to whatever the stock is worth on the day he dies.
His kids inherit the shares at current market value. The decades of deferred gain simply disappear. They can sell the shares right after inheriting them and owe almost nothing in capital gains tax.
The estate uses the borrowed money to repay the loans, and the kids keep everything else.
Compare that to the cash path:
Day one: $24.8 million in taxes
Every year after: ordinary income tax on all earnings
At death: 40% federal estate tax on everything above $15 million
What the kids actually receive: a fraction of what the stock path would have left them
The 4 Things That Can Go Wrong
Of course there are risks, and I am sure many that I am not seeing here but lets start with these…
1. The lock-up period. Most public company acquisitions require founders to hold their new shares for 6-12 months before selling, pledging, or hedging them. During that window, you cannot borrow against the stock or set up the collar. If the stock drops 40% while you are locked up, the plan starts from a much weaker position. You need to believe in the quality of the stock you are receiving before committing to this path.
2. The collar width. If the put and call strikes are too close together, you trigger the constructive sale rule and owe the tax you were trying to defer. If they are too far apart, the protection is weaker than you need. Finding the right range requires a derivatives specialist and a tax attorney working on this for you.
3. The interest carry. Carrying $35 to $45 million in loans at current rates costs roughly $1.75 to $2.25 million per year in interest. That is real money. You need to model that cost honestly against the tax savings over your expected hold period before deciding the math works for your situation.
4. Advisors who do not talk to each other. This strategy requires a tax attorney, a derivatives desk at a private bank, and an estate planning attorney. Most business owners do not have that team coordinated before the deal closes, and that crushes them.
So what did my friend end up doing afterall?
He spent a week thinking about it
He pulled a small team of experts together
And realized that he would be leaving too much on the table if he took all the cash
So he negotiated 1m off the purchase price and got the board to give him permission to pledge his stock. Meaning, he took $66m of stock instead of $67m, agreed not to sell it and only pledge it so that he could borrow against it.
Remember, it’s not what you make its what you keep.
This is not legal or financial advice. If any part of this applies to your situation, talk to a tax attorney and a private wealth advisor before doing anything. The strategy is real and used regularly by sophisticated founders. The execution details are everything.
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