Why I Told My Friend Not to Take $67 Million in Cash.

Key Takeaways

• Cash payout triggers ~37% tax, losing $24.8 M immediately
• Stock swap defers tax under Section 368, preserving full $67 M value
• Borrowing up to 70% against stock provides liquidity without sale
• Collar strategy protects stock downside while avoiding constructive‑sale tax
• Estate inheritance resets basis, eliminating capital gains for heirs

Pulse Analysis

When a founder walks away from a sale, the immediate tax hit can be staggering, especially in high‑tax jurisdictions like California. A $67 million cash distribution faces a 20% federal long‑term capital gains rate, a 3.8% NIIT, and a 13.3% state levy, compressing the net proceeds to roughly $42 million. Beyond the upfront loss, every dollar of subsequent interest or investment income is taxed again, and the estate may later incur a 40% federal tax on amounts above the $15 million exemption. Deferring that liability is a powerful wealth‑preservation lever.

The tax code offers a workaround through a stock‑for‑stock exchange governed by Section 368. By swapping his private‑company shares for publicly‑traded stock, the founder treats the transaction as a non‑sale, carrying his original cost basis into the new shares and postponing tax until an eventual disposition. To access cash without triggering a taxable event, he can pledge the stock for a loan, typically receiving 50‑70% of the market value. The interest on such a loan is often deductible, further enhancing after‑tax returns. Simultaneously, a collar—buying a protective put and selling a capped call—creates a price floor and ceiling, shielding the position from sharp declines while staying clear of the IRS’s constructive‑sale rule, provided the strikes are spaced 20‑30% apart.

From an estate‑planning perspective, holding the stock until death resets the cost basis to market value, allowing heirs to inherit the shares with minimal capital‑gains exposure. However, the approach is not without pitfalls: lock‑up periods can trap the founder during market downturns, overly tight collars may trigger immediate taxation, loan interest can erode savings, and coordinating tax, legal, and derivatives advisors is essential. When executed correctly, the all‑stock route can transform a $67 million payout into a multi‑generational asset, underscoring why sophisticated founders increasingly favor equity‑centric exit structures.