← Liftoff with Keith: Conversations with Super Founders and Growth Experts sharing useful insights
Liftoff with Keith: Conversations with Super Founders and Growth Experts sharing useful insights
Don't Lose It! The Super Founders' Tax Advisor on Building Generational Wealth
00:32:07
Loading summary
Transcript44 lines
- [00:00]
Neil Giussani
Foreign.
- [00:06]
Host
This episode is brought to you by the outstanding team at Compass Strategic Advisors, your trusted partner in driving strategic growth. Whether it's expanding into new territories, launching products, rebranding, or hiring key staff and board members, they offer expert guidance every step of the way. With a versatile approach and a proven track record, Compass is the go to resource for both startups and established companies looking to scale with confidence. Show some support for this podcast by sharing this appreciation and checking out their website at www.compass-strategic-advisors.com. well, this is excited I get to welcome Neil Giussani to the liftoff. Neil is based in Miami, Florida and I haven't had a friend on from Miami in a while. Neil, welcome to the liftoff.
- [00:57]
Neil Giussani
Great to be with you kid. Thank you.
- [00:59]
Host
Folks, you may not be aware, but Neil is one that super founders go to when they need to scale their business from say 20 million to 100 million without losing a ton of money in preventable tax mistakes so they can be build real generational wealth and exit on their terms. So Neil and I are going to chit chat a little bit here about not just building a great company which is so common in my on my program, but how to save a lot of money as well. Do you mind doing having a little bit of that discussion, Neil?
- [01:32]
Neil Giussani
Absolutely. I love that.
- [01:34]
Host
Yeah. So talking about slashing tax bills, that is always of interest to two super founders. What do you find is one of the key ways for them to do that?
- [01:45]
Neil Giussani
Whenever we are talking about tax savings for the founder, you can do at the, you know, multiple levels. So one is at that other exit time. Right. So that whenever, let's say eventually every founder's goal is one day to you know, exit either in a form of taking company to the public or to sell it or you know that there's some form of exit we are looking right. So that that is what is one second place you do the tax planning is ongoing basis. So what happens so many times at the early stage founder don't have a tax problem because they do have kind of, you know, extra cash flow problem because they will be keep investing in the growing the firm. So they will not be but once the company is stabilized and you know, once you are have the real customer and when you are making money and when you're also taking the distribution out then on the yearly basis they will be having the tax issues basically because if you are making you know, a couple million dollar, obviously if you are in California, you're paying half of that money in the taxes basically. So you can do something at the yearly basis do multiple strategies starting from, you know, depreciation based strategy to that charitable donation based strategy or that are the something we can utilize that are they call actual business loss limit. That are the also based strategies. So that actually so many strategies you can do on ongoing basis. And especially if you are getting let's say most of this founder, they must be getting W2 because their, you know, company would be structured as more kind of delivers C Corp. Basically. Right. So data actually they are Getting is primarily W2. So we can do magic at the W2 level as well. And that other probably cut the tax bill in a half on the ongoing basis. But there will be a lot more fun at the exit time. Basically IRS action 12 or two small business stocks basically. And that under the OBB the new bill it has even got better. So that actually you can do quite a bit stuff with that one. So that actually you can shield 15 million one person. But then you can create multiple irrevocable trusts. You, you know, donate your shares and you can shield, you know, substantial money from the taxes. So there's actually quite a bit strategy can be done ongoing basis as well as at the exit time.
- [04:12]
Host
So it's interesting, maybe we break it down between while you're still a private company but you're planning on growing or you're seeing that growth and you see a potential exit coming. What do you do when you're private before you become like. And then what are the strategies to take once you filed to go public and now you have shares that you could sell. What are some of the things you should think about?
- [04:34]
Neil Giussani
Sure. So that other what happened there are, you know, you. You can put the entrepreneur probably in a two bucket, right. One is more kind of. I call them accidental entrepreneur. Basically that guy had no idea that guy was doing the side gig. You know, created LLC and start selling something on Amazon or you know, something like that one and that it actually took. And now that Guy's doing the 100 million and he has 10, 15 million EBITDA margin basically. Right. So that is one area. So in that scenario that guy you probably need to do the right kind of entity planning basically. So he might be LLC tax as S corporation. So I mean that once that guy is going to start making some money, he's going to start looking some IG video or TikTok video or the YouTube short. And people say hey, if you have LLCs and if you have some money then you should do escort election. So they will do The S Corp election because it's going to save some money in that other, you know, that actually self employment taxes basically especially you know, Medicare taxes basically. But if that business turns out to be a serious business now, the S Corp would not cut basically you need to do the proper planning with your entity basically. So that's where we converted from the S Corp. To that actually C Corp. And we like the Delaware domicile and so on and so forth. So that is the one bucket of the entrepreneur. The second one is the entrepreneur from the beginning. Meaning people are incubating the project, they are raising the fund. So hopefully they would have got the right advice from the beginning either from the angel investor or they knew a little bit. So those people will start as more kind of they love our C Corp. Basically. And the reason you do that one is that the C Corp will give you a lot more advantages down the road. Obviously it's going to even though it is kind of actually double taxation. But if you were to take money out when you are founding the growth firm, you are not looking to take money out. You are looking to take money out in the form of exit basically. So in that scenario C Corp would be great and that we like the Delaware because Delaware is much more easier to create the option full for the employee. It is also great for taking the new investors. Basically you can have the foreign investor in your company and so on and so forth basically. So these are the two buckets now that once they have the right right kind of entity structuring. Now we are talking what they can do. So let's say when you are looking to exit or there's something like that one, one I said that you can use something called 1202 IRS section 1202 or we do certain time is before you plan to raise money or sell it or exit. We would like to do the valuation of the company. So you can do valuation at the lower current valuation basically. And then that does actually what you do is that whenever selling. So before that one we create some offshore company. We can create that actually domestic base as well that other. So essentially I'm talking about privacy placement and you sell some of the data the stake in this newer company and then once you go to public or when your time at the exit or that you are selling it, you can exercise the option at the time. So it is a very very powerful way of shielding not only income tax but but the state tax as well. Because most of this founder they don't realize that initially they are worried about the State, you know, income tax, you know that hey I'm making $2 million. They can see half the money goes in the taxes. I need to do something. But at the same time they're also building a net worth basically so that now you're ended up paying the state tax if something were to happen to you or the eventually when you are passing your asset to the next generation. So you need to plan for the state tax as well basically so that actually this kind of strategy will help you not only with income tax but will also help you with estate tax planning as well.
- [08:43]
Host
Interesting. And I have to consider capital gains as well as I are looking at that. How do you view capital gains and what, what advice do you have on that topic? And I know there's some legislation that's always being kicked around so that essentially.
- [08:56]
Neil Giussani
All of these people normally is going to have the capital gain. Unless you know, I have seen so many instance where you actually founder has sold it and you know, they think so it's going to be capital gain. But the buying would give them as that are actually ordinary income. So now suddenly you're paying almost double the taxes basically. But the generally if you structure your deal right basically then it is going to be capital gain. But even with capital gain, if you are in a state of say that to the actual California then you are paying the debt to the national capital gain 20% then you pay net investment income tax on top of that 1 and 13% California state. So that actually you are paying something in the range of 35% plus you are paying in that extra capital gain long term capital gains. So all of the strategy would work for the extra capital gain as well. On top of that one you can do some that actually cheat double based strategy as well. Those can be very, very powerful. That other way to do that one you can do some of the actual depreciation based strategy as well basically. So yes you can. You can do it either for ordinary income or for the actual long term capital gain as well. Either one is fine time.
- [10:06]
Host
How do you assess it when a company is really early stage? Neil, as we deal with so many startups, right? So you're a series A company. You've raised $10 million and you've been granted an equity stake in the company. You're an executive, maybe you even have 1% equity in the company. Do I buy that stock right away or do I wait a little bit and see how the business is going before I pay for it? There's some tax implications with buying it in advance or waiting, what do you recommend?
- [10:38]
Neil Giussani
Ideally you shouldn't be fine, nobody buying at the time. Because even though your stage a business is very, very difficult game. Right. You know, you understand, you know, you talk to entrepreneur day in, day out. And the actual business is that unless you are at series C and you know, pre IPO level, different story basically. But early stage there's a lot of still risk to the business basically. So that are the normal that you don't buy at that level basically. But you know that I would probably exercise that once you are at C level or that other pre. That actually IPO level then at that time you can do that one basically but not at the that other, you know, you know, series L level.
- [11:26]
Host
And what about the case where there's a market evolving now where I can take my private shares in my privately held company and sell them to a third party marketplace who is then marketing that stock and selling it to other investors. Is that something you advise on or is that a. How do you evaluate that kind of a decision? Obviously if you need then you try to get a little bit of liquidity.
- [11:53]
Neil Giussani
Yeah, actually secondaries are actually getting very, very powerful and it is actually a great way. But again that would be at the you know, serious C or you know, pre IPO level. Absolutely. @ the time. I personally believe that again it depends on the actual personality of that person as well and how risk averse that one. But I would probably take some chips off the table, I would probably do some, you know, secondary because the business is also IPO cycle, you know, this business also dependent on the external environment as well. Right. So many a time it's not you have done anything wrong. If that external, you know, external environment changes dramatically, then you know that the IPO is not happening. Okay.
- [12:38]
Host
Yeah, so we were talking, I mean a lot of times these startup companies, you know, before they get to C plus as you point out, that's five years, that could be 10 years. So these companies are looking to get a little bit more liquidity to buy a house, to go on a vacation, to put a kid through college or something. So what are the tax implications then of moving my money to one of the. To getting rid of some of my shares through secondary.
- [13:06]
Neil Giussani
Sure. So that other. I personally believe you don't have a lot more opportunity because at the time the investor do not like either you are say senior executive or your founder. You liquidate some of your shares at the time basically. So that is kind of a bad sign. That's what I look at. But that's been said. Let's say if the investor allows you to take some chips off the table or that the actual liquidate basically then it is essentially that it's going to be your ordinary income. Basically what time the exercise you have exercised. And from that point onward, let's say that whenever you get the, whenever you are actually granted, it is going to be your ordinary debt actual income. Now from that point onward, if you that either get the growth on that one, that would be considered, if you hold it for more than one year then it would be considered long term capital gain. Otherwise you are essentially paying the ordinary income.
- [14:04]
Host
Interesting. And Neil, do you do some advice with clients, entrepreneurs as in terms of setting up family trust, putting some money into kids accounts and other family structures and how does that help with some tax savings?
- [14:21]
Neil Giussani
Sure. So that other by the way we have a two full time estate planning, very, very senior level that actually estate planning attorney on the staff and we do quite a bit advanced work. So that essentially when we are talking about the you know, trust kit, essentially trust falls in two categories, okay. Revocable and irrevocable. By the way, none of this, the tax in action strategy helps with income tax. Okay. Normally it is been done either for the convenience or for the state tax purpose basically. And on top of that one, I think one area that we need to touch upon is the asset protection. What happens is once you start making money and once your net worth grow and once you're in a limelight, people are going to come after you. They want to sue you, they want to take your money. So once you are at this stage, you want to start really building multiple firewalls right around your asset and your future income basically. So that's where the asset protection will come into play. So that's where this trust will make a lot more sense. So that actually family revocable trust we do that is primarily for convenience purpose. It does not give you any income tax or state tax advantages basically but it create lots of convenience. Meaning God forbid something were to happen to you, there will not be a problem. You know, you're the spouse or your beneficiary gets that money and is there's no probate, there's no public records. I think.
- [15:48]
Host
Can I translate that into entrepreneur speak? So you're helping me, you're building me into a company to protect me against me as a family person, you're putting me as a company person and then putting a shield around that or some kind of umbrella, almost like an insurance policy. It's A tax policy.
- [16:08]
Neil Giussani
Absolutely. That is what essentially what we do. That's where we use the irrevocable trust, basically. So whenever you use the irrevocable trust, technically you are donating your ownership or your share to the trust. Okay. Which does not own by you. It is created by you, but it's not owned by you, basically. So meaning that other products in case of lawsuit if there's something were to go wrong. Not only that are the, let's say some third party, but even something were to go within that helps you to that extra protect whatever you have created up to that stage, basically. So irrevocable trust and we use primarily, you know, domestic asset protection trust. Unless your net worth is more than 100 million and you have some, you know, fear we would you know, look for the offshore trust. But otherwise we, you know, try to stay within the taxi us.
- [17:04]
Host
That's interesting. So now talk to me about some of the real hidden tricks but also you know, troubles that you've seen founders, entrepreneurs get into when they've had a lot of money, but they haven't done the taken the right steps. What are some of the common mistakes that that are made sure.
- [17:28]
Neil Giussani
So that other you will find the mistake from the tax angle as well as from the investment angle, basically. Right. So I'm just gonna, I'm just gonna actually break it down in a bot basically so that actually so many times founder, they are successful because they are obsessed of building the company, right? They have no interest, they have no interest in finance, they have no interest in tax, they have no interest in accounting. Only thing gets founders attention is two things, right. It has been said that it is either new revenue or somebo say hey that if you don't do this one then you are toast, you're done. Companies, you know that other done. So those are only two things gets the attention. They have no interest in normal stuff. So I have seen lots of issues in terms of the actual tech side. So either they don't plan properly, do the poor deal structuring basically. So that's where you'll find. So those are the one areas one need to be very, very careful. The second area basically is on the investment side. So now they have a money and until now their business or their company is their investment. Right? But now that either you have that 50 million, you have 100 million, you have 200 million, you got it. And that other what to do. So I think that's where you will find the lots of mistakes happen in terms of investment side. So I Think that is where first thing they need to do is the global asset allocation. Basically. So let's say you have a 200 million that actually you got that one. You divide that one and say that. How do I put it? And then you do the strategic investment. Now that other also one need to be careful is that there. You know that sometimes mistakes happen is people try to, you know, follow somebody else. But I think you need to understand who you are first. As long as you understand and what is your goal and what you're going to achieve in a life, I think the investment decisions becomes easier and that I'll give you the example. Let's say that you like to grow your money really fast and you want to go next level. You got the 200 million, that's great. But hey, I want to be billionaire, right. Then that other. If you will get the traditional investment advice. Meaning that diversify. No diversification kills the return. Right. Basically. So that the idea is that if you're looking for the high growth then obviously you want to have more kind of concentrated position versus somebody say hey that I never imagined that I'm going to have this much money. I'm very happy, I'm comfortable, I'm not looking risk. Then obviously that other diversified portfolio is very, very, very important.
- [20:07]
Host
So this is you playing a key role as an investment advisor. Do you like to recommend formal investment people on the team, as it were to to make the investments and set up the asset allocation models and risk models? Is that something you do or are you part of that effort?
- [20:30]
Neil Giussani
Sure. So no, that actually we do. So I do, I do own another company called Neel Chesani Wealth Management. So that actually we are boutique wealth management firm. We start the relationship with 5 million and above. So that minimum relationship we take is the 5 million. But that that's where we do the real asset allocation and that we are that very, very heavy on alternative asset class, you know, such as private equity, private credit, you know, that other, you know, VC hedge fund, that other structure product, you know, those kind of things on top of the normal traditional, you know, stock market basically. But that we are. We are that very. And that other. So many times people don't realize that private market is way bigger than the public market. What we know is the Amazon and Tesla and Google and Nvidia and you know, those kind of things. But people don't realize there's a much bigger market which is a private.
- [21:26]
Host
Do you have an example Neil of some of the things you like like recently that you've Tried to put some money into on behalf of your clients.
- [21:35]
Neil Giussani
I do understand investment well and I do sit on investment committee but I don't make investment decision. I'm more on a tax side. That's my passion. So I do have a different team. We have affairs and you know CFPs and those are no stuff and they, they do. But I that I particularly don't give an individual investment advice even though I understand. But my, my you know my passion is really on a tech side but I do understand the global asset allocation.
- [22:04]
Host
Yeah. Are you seeing some things happening? I mean we talk about obb, we talk about different tax legislation things that that are happening now that might be in the current environment that that entrepreneurs need to be aware of as well.
- [22:21]
Neil Giussani
That actually you can put the entrepreneur in that other you know, multiple buckets. But I'm just going to focus on the high growth companies and people are making lots of money. So that the other obviously one is that the actual bonus depreciation has you know you actually got back with the hundred percent. So now meaning you know you would be able to depreciate the 100% of the asset right away. So let's say you buy some big piece of equipment. Basically let's say you bought you know that million dollar worth of equipment. Guess what you would be able to depreciate right away one and you can take it right now. So that is back which is going to be very, very important for the entrepreneur. Second One is the IRS section 1202 basically that was 10 million went from 10 million to 15 million. Become very, very important for the founders basically. So they need to follow also they allow that even you can have liquidity even before five years. Otherwise used to be that five years but now you can have that actually the exit before five years and still you can have you know, 60%, 80% of your. That other, you know the that other you know gain would be excluded basically. So that other IRS section 12 or 2 is very very found that actually very very powerful too. So these are the two mainly impact the our audience. Those are you know high growth company, you know, you know high net worth founders, high income founders basically.
- [23:53]
Host
Interesting, interesting. And you also I I would imagine help them with their business account but also their personal account. How does a founder normally balance the two with you? Do they normally take their personal over to Schwab Quicken, you know or, or do they bring it all to you? A business that tries to handle both.
- [24:16]
Neil Giussani
Sure. So mostly even though we do have a team and we have PhD level people in the staff, those are PhDs in the and we understand that things very very well. But most of the time I have seen that we are not great for early stage founder where there's not lots of profit, we create lots of value. When you are really on high growth, you have a really high EBITDA margin. Your top line is actually 50 million plus. That's where we can create lots of value. But that on the individual as long as you are making more than couple million dollar, we can create lots of value. So most of the founder comes for their individual situation. They will bring their co founder or something like that one. And we do the individual based strategy. Because on that actual business side you want to be very very careful. Because goal of the business is to eventually get the exit right. So you don't want to push any personal expenses to that actually businesses and that other one should not be doing either way. But that other even though you are allowed to do that one, you don't want to do that one. And that number two, you also in that all of this kind of company there's investor. So there's going to be quite a bit, you know, scrutiny would come into play as well. Basically. So that generally we said why don't you, why don't you have your business in accounting or that the actual finances is done by some of the mid market accounting firm or that other, you know, whatever your investor suggests. Because many a time the investor will have their own terms and say hey, that I want my accounting firm to do your accounting basically. So that that is fine. And that other we handle the individual side on that other founders basically.
- [26:09]
Host
I think I understand that pretty well. Isn't it kind of funny Neil, how accounting has this perception of being such a boring business. But here we sit all the time talking about companies going public and how exciting the you know this phase of the market is right now where companies you know are finding liquidity now through these big acquisitions and big IP appeals. It's all about not how much you sell for, but how much you keep.
- [26:34]
Neil Giussani
Right, Exactly. So I think that what happened focus changes and that as you said that are the early stage, you know, when there's a no profit. I don't know it is going to become anything or not. So I don't care for taxes, I don't care for the accounting. Right? But once you are somewhere you know that other, you know that I learned earlier on if that other somebody say hey look, I don't care for the taxes meaning that guy's not making money. If that guy's making serious money, he would be very much worried worried about the taxes because when you are cutting the you know, check to IRS or you know actually you know, California state or you know, any other state, you know, millions of dollars, it hurts, you know that even though you are making money but it hurts basically Right. So you want to look for all ethical and legal ways to, you know, that actually minimize your tax burden.
- [27:24]
Host
I think that's so important for founders to realize. I've had the good fortune of taking companies public and having some exits bits but it's funny that the actual price the company sells for either in an IPO or in an M and A doesn't always reflect how much I'm taking out of the business.
- [27:44]
Neil Giussani
Exactly.
- [27:44]
Host
There's so many different you know, steps where you get diluted and liquidity and the. And the founder really needs to understand.
- [27:52]
Neil Giussani
That and and that they need to really engage earlier on and engage the real good advisor I have have handful of story kit that they come and they said oh I sold the company, yes, I need to pay capital gain tax. And when we look at it's not capital gain they gave them the ordinary income basically so that other quite a bit surprise happened and those kind of things that even though you feel good that other you made 50 million but now you are paying taxes as the ordinary income versus long term capital gain. So it does hurt. So in that scenario get the real advice. You know that all this founder understand at the end of the day right people is everything. So once you get somewhere in your life it's the skill, it's the knowledge. That's what is most valued.
- [28:47]
Host
Yeah. And so we want to wrap up a little bit Neil, we've so helpful but share with me a tip or two that we haven't been able to touch on yet that will really help help the founder and that high net worth individual hold on to more of their money and protect themselves.
- [29:07]
Neil Giussani
Absolutely. So that does actually first thing I would say is they do have somehow the notion or we've been brainwashed that when you earn W2 income you cannot do any tax planning. Basically that is what is general motion and that it's true that if you're making half a million dollar there's not a lot more things you can do. I mean that other you know, you can do but you know it's not a lot more valuable basically. Right. So that the idea is that once you get at the serious level meaning when I say serious meaning once you're Making more than million or so as the W2, there's a lot more strategy can be implemented basically. So that is number one. Number two too that other, you know that other make sure that your books is done right because end of the day you know that you are going to get the multiples of your ebitda, right? Basically. So you need to make sure that other because so many times people don't realize. But whenever you are trying to sell the company or you know there is going to be. Once you sign the loi the investors say hey, let me get the access to your book basically right. And that I have seen this is actually actually, you know, very, very important topic. We are talking. You're actually talking. I have seen certain time companies they had unfortunately not so smart accountant. And you know there's going to be phantom income tax issues basically. So there's you know, they have used the data extra cost basis and they do have negative cost basis. And those people haven't made money but now they have to pay taxes on $10 million income. But I don't have $10 million. But that is you have used on the debt transaction pass basically. So that the actual second thing I would say is make sure your book is done right, basically. And the third and final one is even though you are at the early stage needs to have a right estate planning document, you know, and the asset protection in the place. Because the asset protection is a real deal. Once you have a money it is actually a matter of time. Basically somebody's going to come after that is what nature of the best, right? It's like, you know that once you have money you are going to become. It's like you know that other ones, you know, you become some famous. You need some security security around you. You know, that's what it is. It is not right or wrong, but you know, that's what it is. So that similarly, once you're going to start building some, you know, data actually net worth. You need to make sure that you start building those, you know, firewalls basically.
- [31:35]
Host
Neil, this has been fantastic. You've given us such great tips. I feel like I just saved a bunch of money in my tax bill. But you got to sharpen, you got to keep that pencil sharp. Sharp.
- [31:46]
Neil Giussani
And actually thank you for having me. And it was absolutely fun. Yeah, we will do it again.
- [31:52]
Host
We will do it again. And good luck. I know we're not at April 15th right now, but I know we have a tax bill due coming soon.
- [32:02]
Neil Giussani
Absolutely.
- [32:03]
Host
Best of luck, Neil.