Tag: startup

When you’re running a start-up, envisioning the phone call that starts “hello sir, this is John, the head of M&A at Google” you are mostly concerned about product development and expansion in the market, and raising funds to allow such product development and expansion in the market.

Expanding means having your sales team travel around the nation and creating withholding liabilities all around. Salesperson traveling between states may cross states’ de-minimis rules of one or more states that may require your start-up to withhold taxes in those states. It may also result in filing requirements for these employees in more than one state. And you as the employer may have been required to inform the employees of such filing requirements.

Now, imagine that that call from John had come in, and John and his team is willing to start that due-diligence process, and to submit you with an investment agreement. One of the representations that you likely be required to provide in the agreement is “The Company had filed, or caused to be filed, all Tax Returns that the Company is required to file, and ALL SUCH TAX RETURNS ARE TRUE, COMPLETE, AND ACCURATE”. It will also include the following representation “The Company had paid all Taxes due, whether shown or not in the Tax Returns to the applicable taxing authorities, including through withholding.”

Now, can you make these representations? Has your company complied with the relevant and complex withholding tax rules in the varsity of states its sales personnel had traveled to? If you can’t make sure representation, how will it affect the investment and John’s team appetite to invest?

You just sold your startup, what is the connection between your escrow and tax withholding.

When a company undergoes an investment round, M&A, or secondary purchase, it is customary to find in the investment or purchase agreement an amount of the purchase price (between 5%-15% of the purchase price) that remains in escrow for a couple of years, to make sure the buyer has funds retained to cover unexpected or overlooked expenses related to pre-closing periods.

One of such expenses is under-withholding of tax from employees’ compensation (which includes not only base salary and bonuses, but it also includes other fringe benefits, stock or stock options). If you overlooked the withholding requirements in states you were required to withhold and pay, that escrowed amount may be gone, it may also require you to indemnify the buyer, if the amount of tax, interest, and penalties (SEE BLOG ON THAT) exceeds the amount that is in escrow, and you gave a representation that all taxes have been paid (SEE BLOG FOR THAT).