[sida]

It is in the article "Mr. Thiel purchased his founders’ shares in PayPal through his Roth IRA during PayPal’s formation"

I am willing the venture a guess that the initial valuation was far greater than 0.001 per share. And this was all an accounting trick to exploit IRA

[throwaway5752]

I'd guess $.001 is the par value and there was no 409A valuation. The initial basis doesn't really matter if it is essentially zero or $1 or $5 in this case. The implied current price on the founders shares is approximately $2500.

I agree with Propublica's take

Yet, from the start, a small number of entrepreneurs, like Thiel, made an end run around the rules: Open a Roth with $2,000 or less. Get a sweetheart deal to buy a stake in a startup that has a good chance of one day exploding in value. Pay just fractions of a penny per share, a price low enough to buy huge numbers of shares. Watch as all the gains on that stock — no matter how giant — are shielded from taxes forever, as long as the IRA remains untouched until age 59 and a half. Then use the proceeds, still inside the Roth, to make other investments.

I also think that there should be a cap on tax free distributions sheltered by Roths, and they should not be transferable upon death.

[marris]

I disagree with ProPublica's take. If it was as simple as "pay just fractions of a penny per share... watch as all the gains..." then we would all do it. Not just with Roth IRAs, but with our entire portfolios. The reason we don't all do this is because startups are very very risky. Some people will succeed and walk away with windfalls. Other people will lose their shirts. If there was arbitrage, there would be a an "app for that" and there would be more billionaires walking around.

[Scoundreller]

Or just exclude private shares from Roth IRAs.

Most people are non-accredited investors and therefore ineligible to buy them.

Startups won’t miss out on the $2000/yr from the few that are eligible.

[nerfhammer]

The key is knowing exactly which startup to put your $2000 in.

[ajju]

All shares issued at founding have a near-zero cost because, while you technically need to buy the shares, the company (by definition) is worth $0 on the day you start it.

There is no tax gimmick involved in that part. If you require entrepreneurs to buy shares of their own company for large sums of money on the day they start the company, it would dissuade many entrepreneurs. On the day I incorporated my company in Delaware, my debt exceeded my assets and the startup was going to be my only profession.

[machinebun]

Sure - there's no problem with valuing those shares at $0.001 in general, because there's not much that valuation matters for in the short term (eventually you will pay different taxes depending on the end result of your company).

However, Roth IRAs specifically are a tax shelter and have contribution limits, so valuations matter a whole lot for them (difference in $0.01 per share vs $0.001 per share would be a difference of $500M vs $5B today). That's why I think illiquid (or non-market cleared) securities should not be allowed in Roth IRAs.

[Scoundreller]

> the company (by definition) is worth $0 on the day you start it.

Is it?

If Elon Musk forms a corporation tomorrow, its market value is more than $0 before he does a single thing with it.

And that’s all the IRS should care about for Roth contribution limits: market value.

If I buy 1000 shares of PayPal from my mom for $2000 (mkt value: a lot more!) and put that into my IRA and tell the IRS that $2000 is the price we agreed (in the marketplace of the dinner table).

[tylermenezes]

When the company is formed the valuation is genuinely very small because it has no assets, customers, etc. Buying some of your shares in a Roth IRA at this point is relatively common, enough so that I've heard multiple people suggest that founders do it.

[Scoundreller]

Yeah, I doubt Thiel came up with this himself. Was probably recommended by accountants whom should all be familiar with Roth IRAs.

But the possibilities of windfall tax-free profits made sure everyone kept quiet about it.

[woah]

Are you saying that Peter Thiel should have known that he would turn PayPal into a multibillion dollar business, and because of this, the shares were not really worthless?

EDIT: That was sarcastic, but re-reading, that basically is what the article is saying:

> Get a sweetheart deal to buy a stake in a startup that has a good chance of one day exploding in value.

20-20 hindsight

[vmception]

it’s honestly no wonder that the masses assumes inaccessibly expensive accountants are necessary to simply think clearly

[vmception]

Its still surprising to me that you got this backwards. There is no reason to ever choose a higher par value than that then when forming a company.