Corporations provide for long-term capital gains on exit as opposed to ordinary income from operating partnerships. There is essentially a 17% tax exposure that can be avoided if structured correctly. Today the top U.S. tax rate for an individual is 37% for ordinary income and currently 20% for long term-capital gains. Under the Biden Administration, the top individual rate is expected to climb back up to the 39.6%. Typically, VC funds’ exit strategies are to sell the stock and not receive dividends from earnings. Corporations (unlike partnerships) help the taxpayer avoid phantom income. Investors need to pick up their distributive share of income from an operating partnership via Schedule K-1. If the fund is invested in a corporation the investor will only be taxed when the corporation makes distributions, assuming that there are accumulated earnings, or when the investment is sold. A corporation is generally used as a blocker to avoid certain types of unwanted income and to avoid state and local filing obligations for certain investors such as U.S. tax-exempt investors and offshore investors. This will be discussed in more detail in the article. Investment in a C corporation allows IRC Sec. 1202 (Qualified Small Business Stock (“QSBS”)) to kick in. Remember, venture capital funds primarily invest in seed stage or start-up type C corporations and have a three-to-ten year investment horizon. IRC Sec. 1202 allows non-corporate taxpayers to potentially exclude up to 100% of the gain realized from the sale or exchange of QSBS. The lifetime limit on the amount of gain eligible for the exclusion is limited to the greater of 1) ten times the taxpayer's basis in the stock (annual limit) or 2) $10 million gain ($5 million, if married filing separately) from stock in that corporation. This is a per-issuer limitation on eligible gain. In order to qualify for the QSBS exclusion, the small business stock needs to be held for more than five years and must be acquired upon original issuance for cash, for property not including stock, for services, or in certain circumstances by inheritance. The other conditions that must be met include the following:



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When it comes to raising capital, I often hear founders say they want to get in touch with investors who specifically invest in their tiny, niche industry.
We survey 885 institutional venture capitalists (VCs) at 681 firms to learn how they make decisions across eight areas: deal sourcing; investment selection; valuation; deal structure; post-investment value-added; exits; internal firm organization; and relationships with limited partners. In selecting investments, VCs see the management team as more important than business related characteristics such as product or technology. They also attribute more of the likelihood of ultimate investment success or failure to the team than to the business. While deal sourcing, deal selection, and post-investment value-added all contribute to value creation, the VCs rate deal selection as the most important of the three. We also explore (and find) differences in practices across industry, stage, geography and past success. We compare our results to those for CFOs (Graham and Harvey 2001) and private equity investors (Gompers, Kaplan and Mukharlyamov forthcoming).
Investing Reviews.
Investors generally avoid having a very narrow focus because it limits the pool of potential companies they can invest in.
Due to the industry's proximity to Silicon Valley, the overwhelming majority of deals financed by venture capitalists occurred in the technology industry—the internet, healthcare, computer hardware and services, and mobile and telecommunications. In 2023, San Francisco still ranked highest among VC investments. Other industries have benefited from VC funding, including Staples and Starbucks (SBUX).

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