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Sohodojo Advisory Board Member
Jim Schneider
The Taxman86 Speaks...
18 July 2000
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Boulder, Colorado is beautiful for retirement; How a Venture Capitalist Does it; What happen when an IPO does well.

1. Boulder, Colorado is beautiful

As we are checking out the Denver Enterprise Community, we had to check out Boulder Colorado rated #1 for retirement by many, especially if you have stock options according to the July 17, 2000 issue of BusinessWeek.

However, we have a problem with the BusinessWeek's article on page 100 entitled "Time To Reshape Portfolio" where the Levy's are going to exercise their stock options and sell and reinvest the proceeds [all at ordinary income]. Could they have exercised earlier and paid the AMT and had capital gains? What about their 401(k) Plans and Roll Over IRA's; we suggest incorporating their new home-base consulting practice, and creating a SEP, which can be funded with the Roll Over IRAs, this gives much better flexibility.

2. Bob Davoli of Sigma Partners is on a roll.

The July 24,2000 issue of BusinessWeek has as its lead article the day in the life of Bob Davoli,which is very interesting to say the least. First off is the venture capital firm, Sigma Partners, LTD., where are they located, in the Boston Federal Empowerment Zone.

Moreover, the gains that they and their limited partners have realized are most likely Qualified Small Business Stock under IRC Section 1202, as is the Microsoft Stock they may have received, along with other stock in the various tax free mergers discussed therein.. The same may be true of the founders, but what of the employees who made it happen? Is the stock they get from the exercise of their stock options in the merger tax free IRC Section 1202 stock, we doubt it. Does it make a difference we think so, see below.

3. San Diego High Tech Company does well.

Last year a San Diego Company called Copper Mountain Networks, Inc. went public and yesterday the stock hit an all time high of $126+. For the Founders, and the VCs they are doing very well, with Qualified Small Business Stock under IRC Section 1202, and long term capital gains on all their stock at 14% or no tax if the gains are rolled over under IRC Section 1045. What about their employees who have options at $6 and want to exercise and buy their dream home? They are more likely then not looking at ordinary income, or AMT on exercise on the $120 per share spread, and risk of holding for one year. These are not very attractive alternatives,

Could it have been handled differently, we were asked [IRC Section 1202 requires the issued stock to be from a C Corp. with $50M or less in gross assets, and if the IPO is for $75M, you are no longer under IRC Section 1202], and avoid the one-year holding period for capital gains? Why did the Copper Mountain Networks, Inc., have an Incentive Stock Option Plan when they could have had a Restricted Stock Plan and accomplished the same results from the company's point of view but given the employees ZERO CAPITAL GAINS vs. ORDINARY INCOME? Ask their tax advisors.

Jim Schneider, LL.M.

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