It's easier together than alone. This is especially true for the founding of startups. What do ambitious companies need to bear in mind from a tax perspective when co-founders join the company at a later date?
It often happens that the founding team is not complete at the beginning. Only after a certain amount of time does it become apparent that team members who have not been there from the beginning actually belong in the founder's circle. This results in the desire to add more co-founders as shareholders at a time when the startup has already gained momentum. Ideally, this should work without the "late arrivals" having to pay anything for their shares. However, German tax law currently stipulates that the granting of shares at a discount triggers (wage) tax.
So if the startup has already created enterprise value or there is even a valuation already because, for example, the first seed round has closed, such a co-founder entry can be really expensive in terms of tax – we are talking about up to 45% tax on the value that the shares have at entry. To make matters worse, this tax comes at a time when money is tight on all ends.
The most important workarounds for this serious problem are currently the agreement of a so-called negative liquidation preference or the acquisition of shares with a sale price based on the exit – both with or without phantom stocks. These solutions attempt to push the actual enrichment experienced by the co-founder upon joining as a shareholder to zero, thus avoiding income tax.
A third solution is currently on the horizon: The legislature has drafted the so-called Fondsstandortgesetz, which came into force on July 1, 2021. This legislative package contains a new regulation that solves the wage tax problem by not taxing the granting of startup investments to employees for the time being. It will be interesting to see how the planned regulation works out in practice on closer examination. In any case, however, such a belated entry should not be carried out without expert advice.
As tax advisors and auditors, Pape & Co. are involved in the startup scene in many ways and see themselves as high-quality sparring partners for the development from the "bootstrapper" to the investor-funded startup to the dynamic growth company with or without exit.