Exit Strategies Pre-IPO Tax Planning

Brian RowbothamPartner, Tax

Rowbotham & Companybr@rowbotham.com

(415) 433-1177www.rowbotham.com

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Redemption Strategy

Redeeming common stock:

Tax issue: Redemption at 409A value or at Pfd. stock value? Treatment of gains:

- 409A value – Long-term capital gain

- Spread between common and preferred - ordinary or capital?

Per share: common – 409A value $0.75

C Round preferred stock value $1.50

# of shares redeemed? Which value to use? ?

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Stock Transactions

Exercise of non qualified stock options: Ordinary income on spread, when exercisedBut there’s no cash in hand to pay the tax.

Trusts to minimize state tax by using non-California trustee: DING – WING - NING Trusts (Incomplete Non-Grantor Trust): Irrevocable trust – Income tax assessed on Trust Distributions constitute completed gift

• States to consider - Delaware – Wyoming – Nevada • There are restrictions on controlling investment decisions

Lifetime gift tax exclusion $5.34mm for each taxpayer($10.68mm for H &W)

Annual gift tax exclusion $14,000 per donee

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Planning vs. Securities Compliance

International tax planning may achieve efficient outcome with foreign family investors

Execution: Working with advisors – legal, tax, and financial To achieve targeted outcome, one must:

- Have good documentation

- Follow the structure – or the IRS will disregard Plan ahead to avoid unexpected hurdles

Non-U.S.

ForeignCorporation

U.S. LLC

U.S.Shares

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Reporting Non-U.S. InvestmentsFiling “Activities” include ownership in:

Potential PenaltiesIRS Forms for Non-compliance (1) (2)

(1) Non-U.S. Corporation 5471 $10,000 / per year

(2) Non-U.S. Partnership entity 8865 $10,000 / per year

(3) Non-U.S. Trust 3520 25% of distribution 3520A 5% per month up to 25%

(4) Transfers of Assets to 926 25% of value (max $100,000) a non-U.S. corporation

(5) Specified Foreign 8938 $10,000 / per year Financial Assets

(6) Foreign Bank & FinCEN 114 50% of highest balance each year Financial Account (formerly TDF 90-22.1)

(1) Potential criminal prosecution can result for non-reporting.

(2) If a U.S. resident files nonresident return based on an income tax treaty, they are still required to comply with all the disclosures above.