| Rounds of investment and acquisition are both complex transactions. The simple way to think about it is that when a VC or other investor invests in a company the company creates new shares that are issued to the investor. So a company might be incorporated with 10 shares that are all issued to the founder, then the company might take $10k investment and create another 5 shares that are issued to the investor. The founder still owns her original 10 shares, but the total number of shares in the company are now 15, so she now owns 67% of the company, not 100%. The investor has 5 new shares (33% of the company) and the company is valued at 3x what the investor paid ($30k). Later the investor decides to buy the whole company, so they offer $40k to the founder for her shares (the company has doubled in value). No new shares are created, it's just a change in ownership of existing shares. So if the number of shares issued has increased the money goes to the company, if it's just shares changing hands then the money goes to the shareholder(s). When you sell shares you pay personal income tax. In the US that means federal (long- or short-term capital gains depending on how long you owned the shares), state, and local taxes. Often the company rules prohibit the sale of shares pre-IPO outside some kind of merger/acquisition approved by the board. There may be different classes of shares that have different voting rights. Shareholders don't control a company, the board of directors controls the company and decides when to issues more shares. If the founder of the company either sells enough shares, or allows the board to issue enough shares, that they no longer hold a majority of the voting rights then the other shareholders can replace the board of directors who can do whatever they want to the company. (edit: typos) |
> When you sell shares you pay personal income tax.
When I watch "Dragons Den"/"Shark Tank" investors always bid for higher percentage of the startup, and as a rule, they always ask how founder intends to spend that money, therefore I concluded that the money stays in the company. Now, as you say, if I understood correctly, that money is transferred to private not corporate bank account, is it reinvestment of the sold company shares exempted of the both personal income tax and corporation tax?
I mean if you ask a VC to invest $100K for 10% as you need it for growth and that goes on your private account, in UK at least you would need to pay 45% on all money you made that year, so let say if you earned additional $50K on permanent job elsewhere you would pay $67.5K total - significantly reducing your ability to live and scale the company.