Buying to Sell: Private Equity Buyouts and Industrial Restructuring

The VC sector is interesting both in its own right and as a proxy for entrepreneurial finance more broadly. We highlight the tax treatment of stock options as an important factor for variations in the size of the VC sector. VC often relies on option-based contracts to mitigate incentive problems. Granting stock options to founders and key employees also allows credit-constrained start-ups to attract and retain top talent. Such compensation cannot be unambiguously classified as either capital or labor income. Some tax systems treat stock options in VC-funded firms as highly taxed employee compensation, whereas others treat them as capital gains with low flat tax rates. The effective rate depends on tax practices and is not readily indicated by statutory taxes. The tax consultancy firm PwC calculated the effective tax rate for a standardized entrepreneurial case in 22 countries, which is supplemented with our own calculations for 16 additional countries. For this sample, we find a negative crosscountry relationship between the effective tax rate on employee stock options and the extent of VC activity. The negative effect is stronger for countries with high R&D investments and weaker in countries with low R&D spending.

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Buying to Sell: Private Equity Buyouts and Industrial Restructuring

Cited by 4 publications

References 52 publications

Private Equity Funds and Strategic Buyers

Private Equity Funds and Strategic Buyers

Cross-border acquisitions and restructuring: Multinational enterprises and private equity-firms

Stock option taxation and venture capital activity: a cross-country study

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