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Comment by ve55 | Hacker News Reader

What seems most unfair here is how difficult dealing with private equity is as a normal person; the entire purpose of the Roth IRA is that you do not pay any taxes afterwards, and that is how it functions for everyone, whether you are rich or not. On the other hand, the same cannot be said about the ability to purchase, find, and work with private equity. I understand many publications may dislike certain people (as one can note from who they choose to mention the most), but I don't see a reason why he would decline using tax-advantaged accounts just because he has attained significantly larger wealth and roi than most others using them.

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I agree about access to private equity, but did you read the whole thing?

He purchased shares of his own startup at 0.001 cents, way below market rate.

To me, that's clearly not the intent of Roth IRA. This means any startup founder can simply put their ownership shares into their Roth IRA and never be taxed on their company growth.

It also doesn't seem they singled out Thiel, he has the biggest Roth IRA they know off, seems logical to discuss him the most.

How is there a market rate if his startup was not publicly trading?

The nominal value of the shares in my startup are £0.01. Sure, that's not what we've sold shares for, but the price we have sold them for was purely what the buyer was willing to pay for them.

So, I was reading into this a bit recently after getting an equity offer (also in the UK). The "fair market value" is open to interpretation, but if the inland revenue come calling, you need to be able to explain it. For a startup with no assets that has not previously sold shares, £0.01. Is just fine. But if you've got assets, or you've previously sold shares as more than that, then quite clearly the market value is more than a penny.

I mean, what better definition of "fair market value" is there than "what the buyer was willing to pay for them"?

Funding rounds constitute a valuation.

> that's clearly not the intent of Roth IRA

Would you say the same if someone used a Roth to buy Bitcoin when it was trading at pennies or Gamestop before it blew up?

What's wrong with having the right to invest in your own company? That company pays corporate income taxes. You pay income tax as an employee.

Also, everyone seems to forget Peter Thiel was part of the middle class when he did this...

Thats not the right analogy. This would be more akin to selling your own bitcoins to yourself (into an IRA) for pennies on the dollar.

The Roth IRA is not suppose to be a tax shelter for people to get super rich off their own creations. You are not getting a reduced priced Bitcoins or Gamestop stock. You are gambling with your own funds based on information that everyone else has and paying the same price as anyone else. If you get Bitcoins and/or Gamestock at a reduced price, then you are abusing the Roth IRA and the IRS should stop and fine you.

Did that happen? Even ProPublica does not claim it.

Would Thiel have been willing to sell his shares to someone else at $0.001 at the time he put them into the IRA? Because that's ultimately what market value is about.

It's also one of the valuation proposals for people playing valuation games with illiquid assets. You can declare them at whatever value you want (and pay tax on that value), but you are forced to sell if someone offered you that value for the asset (if you claim your house is worth $1M, we'll let you pay property tax on $1M, but if someone offers you $1.1M for your house, you're forced to sell). That would cut down on people inflating/deflating asset valuations to game tax codes.

I am not interested in what would have, could have, or should have happened. I am trying to find out what did happen, and any evidence to support it.

You have an interesting proposal for valuations though, although, it seems to have a few logistic hurdles that cross my mind.

What happened was Thiel buying 1.7M shares of stock in his own startup at a value of $0.001 per share in 1999 in his Roth IRA (and then cashing out for $30M+ in 2002). It's debatable whether it was legal (because he was an officer/director of the company and that law is on the books), but the better question would be - should it have been illegal, and the answer to that, in my opinion, is a resounding yes.

I believe non-public investments should be banned from Roth IRAs (and that we should close all of the backdoor loopholes to them as well). They were meant for a certain group of people at the outset and were then twisted around in knots to provide more tax-breaks for the well-off (which should be rolled back). I think mega backdoor Roth should not be a thing, rollover Roth IRA should not be a thing - bring Roth back to it's original vision.

>It's debatable whether it was legal (because he was an officer/director of the company and that law is on the books)

I am interested in finding out the answer to this, as others have posted in this thread the text of the law which makes it seem like he should not have been able to, and what reasoning could possibly have made it legal.

You won't find the answer, because you're innocent until proven guilty. The laws are not formally defined, it would need to go in front of courts, and then people could argue whatever interpretation and evidence they want to convince one way or another.

I think what's more clear is that it's clever and probably an unintended loophole, be it technically legal or not isn't so important. What matters in the end is a bunch of money didn't go to maintaining society's infrastructure, paying for military, and all that, instead money from other sources and other people's pockets was used. Do you care? Do we care? I think that's the more relevant dimension to think about and discuss.

The IRS apparently agreed with you. The article sloppily doens't doesn't give a year, but:

> The IRS, meanwhile, was floundering in its efforts to police retirement accounts. At one point the agency recommended Congress prohibit IRA accounts from buying investments that aren’t traded on a public market, such as founders’ shares. That went nowhere, too. Instead, Congress began slashing the IRS’ budget, kneecapping the agency for more than a decade.

> Would Thiel have been willing to sell his shares to someone else at $0.001 at the time he put them into the IRA? Because that's ultimately what market value is about.

Well... no. (Can't believe I'm defending Peter F-ing Thiel)

I might own some AAPL shares that I think are worth $1000/share--so I'm not willing to sell my AAPL shares for less than $1000 each. The market (today) thinks they are worth $133/share. Who is right?

Thiel might have really truly believed that his 2M shares would be worth a few billion dollars one day. But if you can't find anyone who is willing to buy them for that price, then it doesn't matter. The "fair market value" (what the IRS cares about) of those shares is not a few billion dollars. It doesn't become a FMV until you can find an arms-length buyer who is willing to buy the shares for that price.

You could pay someone to create an independent valuation of the shares--but for a brand new company that has no employees and no assets, not even IP, why would you expect the valuation to come back at much more than $2k?

> PayPal later disclosed details about the early history of the company in an SEC filing before its initial public offering. The filing reveals that Thiel’s founders’ shares were among those the company sold to employees at “below fair value.”

The article implies 0.001$ was below fair value based on PayPal's own declaration at the IPO. That's why.

In any case, I think this is unimportant, the important question is can a founder always transfer their owning shares into a tax advantaged Roth IRA? Does this make sense to permit?

If I start a company today and just buy my shares into my Roth IRA before I even write a single line of code or hire anyone, so that if my startup grows all my owning shares of it are tax exempt.

And if it does, to what extent? Should there be no cap?

In reality it's all just a political question, who should pay taxes, how much, and in what circumstances.

Articles like this I think help people understand and think through some of the edge cases around that, to better allow them to form an opinion on it.

I did, but I'm not sure I have enough information to conclude if what was done should be illegal/allowed or not, since this is based on various sections of leaked documents, but it's quite possible some bad things were involved. (One may remark that turning small investments into the many billions quickly clearly is a sign that foul play was involved, but recall that his original 10% stake in FB would be worth almost $100B today in less than 20 years. I do think he sold most of the stake long ago, though.)

> He purchased shares of his own startup at 0.001 cents, way below market rate.

Source?

TFA. Although I think they’re wrong on this account. It doesn’t matter that the stock was worth more mere months later when the cashed their investment checks.

But what is an issue is the self-dealing of buying shares in a company he holds a major role in the management of.

> He purchased shares of his own startup at 0.001 cents, way below market rate.

The proper term is "fair market value" and before a company is publicly traded, the FMV is set by the Board and whatever investors have evaluated it and determined it to be.

In this case, it looks like it was before any investors had put in their money so the Board was simply the founders. At that stage, the Board normally sets the strike price (what you get the shares for) the same as the fair market value (what they're "worth") and you pay taxes on the difference. Fractions of a cent are common at that stage.

The risk is that the fair market value will never go higher and is likely to be zero (aka failed).

> He purchased shares of his own startup at 0.001 cents, way below market rate.

How do you know that was below market rate? Startups generally begin with shares worth almost nothing.

Why don't you think that was the intent of the Roth IRA, or more specifically within the intent.

The intent of Roth products were to give money to a broke government up front. The government created Roth products for that specific reason and there is no further intent. They made the contract with the people and some of the people actually read it. All tax exempt and tax deferred products can invest in and hold whatever they like with prohibitions generally being on level of control or debt financing. Simply having a prohibition on some kind of property ownership doesn't make sense and I would probably challenge it on constitutional grounds.

Their claim that the shares were below market value doesn't stack up. They did this when they founded the company, the company has no value at formation so it's fair priced. Just because they raised money a few months later doesn't mean it was worth anything at formation.

If you have knowledge that people want to inject money into your startup (and thus raising the value), then stuffing shares into a Roth IRA before a raise (that you know will happen) would surely be skirting the idea of fair-market value.

That very same year, there were two or three funding rounds, according to the article, for $0.5m and $4.5m. Yet at the end of the year, the shares in the Roth were reported to be worth less than the initial $1700.

Also, if you aren't trading public stocks, it seems much easier to get around size limitations. When you spend $5500 buying the SPY, the government is incredibly certain that is the amount of money your investment was valued at. If you buy $5500 of stock in a startup? Who is to say? The opportunity to buy that stock might have been worth 10x that amount the moment that transaction occured, and there's no real way for the government to actually determine that.

I don't think it's a dislike of certain people or blaming them for doing these (legal) investment moves. It's about changing the rules to provide more financial equality in our society. I think it's now too easy for the rich to get richer and too hard for the poor to come up. I'm not suggesting banning rich people, and we can debate over matter of degree of equality that's good.

(edit: typo)

Generally agree; I mention it since from my point of view, I would have spent most of the article criticizing the rules and policies politically and finding ways to improve them, rather than constantly going on about the personal lives of some that have exploited them (although it does seem like it cannot be helped sometimes).

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