Silicon Valley North #19 May'00

The Way I See Itů by Michael Volker

High Valuations and tax rules may benefit Universities

Suppose you're a co-founder of a successful technology firm. For your efforts, you are rewarded with a $2 million cash bonus - one of many such bonuses. Taken as salary, you'd be left with half that amount, after paying taxes. Of course, it is unlikely that you would earn such a bonus in cash. Earning it through capital appreciation on your zero cost founders shares is a more likely scenario.

Because of the more favorable tax treatment on capital gains coupled with the tax credit on charitable contributions, let's take a look at what you can do with a $2 million windfall on stock.

Instead of selling your founders shares, you contribute $1 million worth of stock to your alma mater as a charitable donation. You also sell another $1 million for yourself. On your donation, you are deemed to have disposed of the shares but instead of being taxed on two-thirds of the gain, you are taxed on only one-third of this at your full marginal rate of, say 50%, implying a tax liability of approximately $166K.

On the $ 1 million which you sold for yourself, you will have a net tax liability of $333K. However, on the other $1 million in stock donations, you get a tax credit of 50% which almost wipes out your entire tax bill of $500K arising from these two transactions.

Sure, if you had not been quite so generous, making no donations, you would have netted $1.33 million. But look at it this way: by donating $1 million in gains you're in roughly the same situation as you'd be if you had earned the same amount in the form of a salary bonus. Regardless of how you might rationalize it, it really isn't all that painful.

So why am I making this pitch? Many would agree that the sharing of some new- found wealth with worthwhile causes is a very admirable deed. I would argue, though, that such actions are not just "nice", they are absolutely essential in securing our future prosperity, especially if the beneficiaries are our universities.

Our American friends understand this. Statistics show that they are more generous in altruistic terms. It goes beyond generosity, though. Look at the endowments enjoyed by some of their leading universities such as Stanford and MIT. High technology entrepreneurs know that research and higher education are the lifeblood of their enterprises.  Sustaining this valuable resource makes good business sense.

Jeff Skoll, a University of Toronto alumnus and Vice President at eBay.com, recently contributed $7.5 million to the University. Thanks to even more favorable tax breaks in the U.S. which, unlike Canada, encourage donations to private foundations, Bill Gates has created the largest foundation in that country by gifting appreciated stock.

We all know that our Canadian universities are not meeting the demands of industry - with respect to addressing the escalating skills shortage and fueling the R&D engines by attracting and retaining researchers and educators. Counting on government alone to address these issues won't work.

In British Columbia, the market value of publicly traded technology firms has appreciated more than ten-fold to almost $100 billion in just two years. If a mere one percent of that increase could flow back to the Province's universities, their combined annual operating budgets would double!

The way I see it, private sector financial support of higher education and research in Canada is a necessary condition for sustaining our prosperity in the new economy. We can't compete effectively without such support. New tax rules make it a great deal easier for us to meet these obligations.



Michael Volker is a high technology entrepreneur and director of Simon Fraser U's University/Industry Liaison Office. He is a former executive director of the BC Advanced Systems Institute and is chair of the Vancouver Enterprise Forum. He may be reached at mike@risktaker.com.

Copyright, 2000.