Industrial cybersecurity startup Claroty raises $140M in pre-IPO funding round

Claroty, an industrial cybersecurity company that helps customers protect and manage their Internet of Things (IoT) and operational technology (OT) assets, has raised $140 million in its latest, and potentially last round of funding. 

With the new round of Series D funding, co-led by Bessemer Venture and 40 North, the company has now amassed a total of $235 million. Additional strategic investors include LG and I Squared Capital’s ISQ Global InfraTech Fund, with all previous investors — Team8, Rockwell Automation, Siemens, and Schneider Electric — also participating. 

Founded in 2015, the late-stage startup focuses on the industrial side of cybersecurity. Its customers include General Motors, Coca-Cola EuroPacific Partners, and Pfizer, with Claroty helping the pharmaceutical firm to secure its COVID-19 vaccine supply chain. Claroty tells TechCrunch it has seen “significant” customer growth over the past 18 months, largely fueled by the pandemic, with 110% year-over-year net new logo growth and 100% customer retention. 

It will use the newly raised funds to meet this rapidly accelerating global demand for The Claroty Platform, an end-to-end solution that provides visibility into industrial networks and combines secure remote access with continuous monitoring for threats and vulnerabilities. 

“Our mission is to drive visibility, continuity, and resiliency in the industrial economy by delivering the most comprehensive solutions that secure all connected devices within the four walls of an industrial site, including all operational technology (OT), Internet of Things (IoT), and industrial IoT (IIoT) assets,” said Claroty CEO Yaniv Vardi.

To meet this growing demand, the startup is planning to expand into new regions and verticals, including transportation government-owned industries, as well as increase its global headcount. The company, which is based in New York, currently has around 240 employees. 

Claroty hasn’t yet made any acquisitions, though CEO Yaniv Vardi tells TechCrunch that this could be part of the startup’s roadmap going forward.

“We’re waiting for the right opportunity at the right time, but it’s definitely part of the plan as part of the financial runway we just secured,” he said, adding that this latest funding round will likely be the company’s last before it explores a potential IPO.

“We are thinking that this is a pre-IPO funding round,” he said. “The end goal here is to be the market leader for industrial cybersecurity. One of the mascots can be going public with an IPO, but there are different options too, such as SPAC.”

The funding round comes amid a sharp increase in cyber targeting organizations that underpin the world’s critical infrastructure and supply chains. According to a recent survey carried out by Claroty, the majority (53%) of US industrial enterprises have seen an increase in cybersecurity threats since the start of 2020. The survey of 1,110 IT and OT security professionals also found that over half believed their organization is now more of a target for cybercriminals, with 67% having seen cybercriminals use new tactics amid the pandemic. 

“The number of attacks, and impact of these attacks, is increasing significantly, especially in verticals like food, automotive, and critical infrastructure. Vardi said. “That creates a lot of risk assessments public companies had to do, and these risks needed to be addressed with a security solution on the industrial side.”

A look inside Google’s first store, opening in NYC’s Chelsea neighborhood tomorrow

There have been plenty of pop-ups over the years, but tomorrow Google’s first store opens in NYC’s Chelsea neighborhood. The brick and mortar model finds the company joining peers like Apple, Microsoft, Samsung and even Amazon, all of whom have a retail presence in Manhattan, including several just around the corner from Google’s new digs.

The new space, which opens tomorrow morning at 10 a.m. local time, fills 5,000 square feet of selling space in Google’s big, pricey West Side real estate investment. The retail location was previously occupied by a Post Office and Starbucks, which vacated the premises once their leases expired under their new corporate landlord.

Image Credits: Photos courtesy of Google and Paul Warchol

The store’s layout is designed to be experiential, highlighting the company’s growing hardware portfolio along with select third-party partners. Essentially it’s a way for the company to get Pixel phones, Home offerings, Stadia, WearOS and the newest addition to the hardware portfolio, Fitbit devices, in front of tourists and locals.

“We really used the pop-ups over the last several years to get a better sense of what are customer expectations for what we can uniquely deliver at Google,” VP Jason Rosenthal said during a press preview week. We’ve taken learnings from our 2016, 2017, 2018 and 2019 pop-ups and really fed that learning into what we’re opening[…] in Chelsea.”

Due to pandemic restrictions, the preview was virtual. And while it’s open to the public this week, the company will be maintaining the standard safety precautions, as the city deals with (knock on wood) the tail end of the pandemic.

And while COVID-19 almost certainly slowed the planned opening, Google promises that things will be in full force starting tomorrow. This follows several weeks of piloting, wherein the store’s 50 or so staffers were put through their paces, while the company put the finishing touches on the experience. Prior to this, Google built a full-size store mockup in a hangar space in Mountain View to test out ideas.

Image Credits: Google and Paul Warchol

In addition to product screens and dioramas lining the 17-foot windows, the company filled the store with “sandboxes” — effectively scenarios like a living room, not dissimilar to what you might find in a large furniture store — albeit better lit. There’s also a gaming area for playing Stadia and a soundproof spot for testing out various Home/Nest products.

Like Apple’s Store, customers can bring in for repair broken devices like Pixels. The company says it’s growing the number of devices that can be repaired on-site, while certain issues, like a broken screen, should be able to be fixed same day.

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It seems likely that the store is a pilot in and of itself, with further plans to open additional locations in the U.S. and, perhaps, international markets where the company sells hardware. For now, however, Google won’t discuss the subject beyond tomorrow’s opening in Chelsea.

Fashion wholesale marketplace Joor opens China office

Joor, an online marketplace that connects fashion brands and retailers around the world, has opened its first China office in downtown Shanghai as it eyes growth in the region.

The 11-year-old New York-based company works as a virtual showroom for brands, which traditionally would meet with their retail partners in physical venues to showcase the latest collections. With Joor, showrooms become live videos, a feature that has no doubt proven useful during COVID-19.

The company also gives brands a set of data tools to analyze their sales that can inform future productions. For buyers, the benefits are similar — they are able to see which brand or product is trending and make better forecasts.

The expansion into China follows a robust year for Joor in APAC and the opening of its offices in Melbourne and Tokyo. Joor’s wholesale volume ordered by retailers in the region grew 139% year-over-year in 2021, and wholesale volume for APAC-based brands was up 419%, the company said in an announcement.

“The establishment of JOOR Shanghai will allow us to provide frictionless wholesale management to the range of fine brands and retailers across the country,” said Joor’s CEO Kristin Savilia in a statement. “It builds on our existing leadership position in North America and Europe, and we expect continued expansion across the Asia-Pacific region.”

Joor’s marketplace boasts more than 12,500 brands and over 325,000 retailers around the world to date. The company has raised over $35 million in funding, according to its disclosed rounds. Its investors include venture capital firms Battery Ventures and Canaan Partners as well as the 71-year-old Japanese trading house Itochu.

In-person work is back, and New Stand just raised $40M to help ease the transition

As more people return to the office over the next few months, companies will have to work harder than ever to make sure the environment is comfortable and inviting.

One company that is out to ease the pain of millions of employees leaving the comfy confines of their homes and losing the convenience of conducting meetings in nice tops and sweatpants has just raised new funding to help it advance on its goals.

New York-based New Stand announced it has raised $40 million in a Series B funding round led by Brookfield Property Group, one of the largest commercial real estate owners in the United States. Existing backers Maywic, Fantail Ventures and Raga Partners also participated in the financing, which brings the company’s total raised to just over $56 million since its 2015 inception.  

New Stand is a clever take on the “newsstand” concept. The startup has built a modern-looking smart vending physical product that can be set up in all sorts of different spots –– from office lobbies to floors of companies within an office building to hotels to college campuses to airports. The company’s first location was at the Union Square subway station in New York City. Over time, New Stand has combined that physical presence with an app that is designed to give people convenience in getting basics (think snacks, books and personal care items such as umbrellas or pain relievers, for example) as well as access to “location-based media.”

On top of that, it wants to partner with companies to offer its platform as a way to communicate internal news in a more fun and engaging manner. The company is making a big push in the office vertical with the launch of its New Stand at Work, a workplace amenity.

So it’s not entirely surprising that Brookfield, one of the biggest commercial landlords in the country, would want to back a company that aims to make tenants and their employees happier.

TechCrunch talked with co-founder and CEO Andrew Deitchman about the new raise and plans for the capital. He earnestly describes New Stand as a “day improvement company” that aims to make people’s days easier and more interesting.

“And we do it by making sure we have basic stuff that people need, but also curating things that we think they would like,” he said. “We have little shops or touch points that are like convenience stores, and we combine that with an app that introduces people to content, and also allows them to interact in other ways to accumulate points and rewards.”

“So what New Stand really is building is a media and technology company, using convenience points as a means of accessing people’s lives and making their days a little bit better,” Deitchman added.

New Stand is working to evolve from being primarily a consumer business to an enterprise one.

“We can take care of basic needs but also engage people in a deeper relationship,” Deitchman said. “If you’re an employer who wants to relate to an employee or if you are a landlord who wants to relate better to your tenants, we can help make that happen.”

The company is planning to use its new capital primarily toward expanding into new spaces, office and otherwise. Currently, it’s in about 20 locations. 

It’s also planning to create “new engaging services and formats” and “grow and densify its distribution.”

In line with its investment, Brookfield Properties said it plans to “further activate” its properties in New York and, ultimately beyond, with New Stand’s offering.

Ben Brown, managing partner and head of the U.S. office in Brookfield’s Real Estate group, notes that prior to this investment, Brookfield had already partnered with New Stand at its flagship property, Brookfield Place New York — both as an amenity for its tenants and as an offering in its own office space for employees.

“On both fronts, New Stand has provided an elevated experience with tangible benefits,” he told TechCrunch. “As one of the largest — if not the largest — commercial real estate owners in the country and world, we have a particular interest in investing in enterprises we ourselves use, see the value in, and can help scale over time.”

Brown said the combination of New Stand’s physical assets and media platform has given Brookfield the opportunity to boost engagement with its tenants’ employees as well as its own, something “all landlords are trying to do.”

“Helping the world’s leading companies attract, retain and motivate their workforces has long been job one for us, and that has only intensified today as firms increasingly look for ways to have the office compete with the home,” he added.

Zocdoc says ‘programming errors’ exposed access to patients’ data

Zocdoc says it has fixed a bug that allowed current and former staff at doctor’s offices and dental practices to access patient data because their user accounts weren’t properly decommissioned.

The New York-based company revealed the issue in a letter to the California attorney general’s office, which requires companies with more than 500 residents of the state affected by a security lapse or breach to disclose the incident.

Zocdoc, which lets prospective patients book appointments with doctors and dentists, said that it gives each medical or dental practice usernames and passwords for its staff to access appointments made through Zocdoc, but that “programming errors” — essentially a software bug in Zocdoc’s own systems — “allowed some past or current practice staff members to access the provider portal after their usernames and passwords were intended to be removed, deleted or otherwise limited.”

The letter confirmed that patient data stored in Zocdoc’s portal could have been accessed, including a patient’s name, email address, phone number, and the times and dates of their appointments, but also other data that may have been shared with the practice — such as insurance details, Social Security numbers and details of the patient’s medical history.

But Zocdoc said payment card numbers, radiological or diagnostic reports, and medical records were not taken, since it does not store this data.

In an email, Zocdoc spokesperson Sandra Glading said that the company discovered the bug in August 2020, but “due to the complexity of the code, it took a significant amount of investigation to determine which, if any, practices and users were affected and how.” The company said it provided notice to the California’s attorney general’s office “as soon as was practicable.”

Zocdoc said it has “detailed logs that can detect exploitation of any data, including any potential exploitation of this vulnerability,” and that after a review of those logs and other investigative work, “we have no indication, at this time, that any personal information was misused in any way.”

Around 6 million users access Zocdoc a month, the company said.

If this incident sounds vaguely familiar, it’s because this was a near-identical security issue to one Zocdoc reported in 2016. A letter filed at the time cited similar “programming errors” that allowed staff at medical providers to improperly access patient data.

Zocdoc says ‘programming errors’ exposed access to patients’ data

Zocdoc says it has fixed a bug that allowed current and former staff at doctor’s offices and dental practices to access patient data because their user accounts weren’t properly decommissioned.

The New York-based company revealed the issue in a letter to the California attorney general’s office, which requires companies with more than 500 residents of the state affected by a security lapse or breach to disclose the incident.

Zocdoc, which lets prospective patients book appointments with doctors and dentists, said that it gives each medical or dental practice usernames and passwords for its staff to access appointments made through Zocdoc, but that “programming errors” — essentially a software bug in Zocdoc’s own systems — “allowed some past or current practice staff members to access the provider portal after their usernames and passwords were intended to be removed, deleted or otherwise limited.”

The letter confirmed that patient data stored in Zocdoc’s portal could have been accessed, including a patient’s name, email address, phone number, and the times and dates of their appointments, but also other data that may have been shared with the practice — such as insurance details, Social Security numbers and details of the patient’s medical history.

But Zocdoc said payment card numbers, radiological or diagnostic reports, and medical records were not taken, since it does not store this data.

In an email, Zocdoc spokesperson Sandra Glading said that the company discovered the bug in August 2020, but “due to the complexity of the code, it took a significant amount of investigation to determine which, if any, practices and users were affected and how.” The company said it provided notice to the California’s attorney general’s office “as soon as was practicable.”

Zocdoc said it has “detailed logs that can detect exploitation of any data, including any potential exploitation of this vulnerability,” and that after a review of those logs and other investigative work, “we have no indication, at this time, that any personal information was misused in any way.”

Around 6 million users access Zocdoc a month, the company said.

If this incident sounds vaguely familiar, it’s because this was a near-identical security issue to one Zocdoc reported in 2016. A letter filed at the time cited similar “programming errors” that allowed staff at medical providers to improperly access patient data.

Nigeria’s Mono raises millions to power the internet economy in Africa

In February, Nigerian fintech startup Mono announced its acceptance into Y Combinator and, at the time, it wanted to build the Plaid for Africa. Three months later, the startup has a different mission: to power the internet economy in Africa and has closed $2 million in seed investment towards that goal.

The investment comes nine months after the company raised $500,000 in pre-seed last September and two months after receiving $125,000 from YC. Mono’s total investment moves up to $2.625 million, and investors in this new round include Entrée Capital (one of the investors in Kuda’s seed round), Kuda co-founder and CEO Babs Ogundeyi; Gbenga Oyebode, partner at TCVP; and Eric Idiahi, co-founder and partner at Verod Capital. New York but Africa-based VC Lateral Capital also invested after taking part in Mono’s pre-seed.

In a region where more than half of the population is either unbanked or underbanked, open finance players like Mono are trying to improve financial inclusion and connectivity on the continent. Open finance thrives on the notion that access to a financial ecosystem via open APIs and new routes to move money, access financial information and make borrowing decisions reduces the barriers and costs of entry for the underbanked

Launched in August 2020, the company streamlines various financial data in a single API for companies and third-party developers. Mono allows them to retrieve information like account statements, real-time balance, historical transactions, income, expense and account owner identification with users’ consent.

When we covered the company early in the year, it had already secured partnerships with more than 16 financial institutions in Nigeria. In addition to having a little over a hundred businesses like Carbon, Aella Credit, Credpal, Renmoney, Autochek, and Inflow Finance access customers bank account for bank statements, identity data, and balances, Mono has also connected over 100,000 financial accounts for its partners and analysed over 66 million financial transactions so far.

Mono has done impressively well in a short period. While it appears to have figured out product-market fit, CEO Abdul Hassan is quick to remind everyone that the burgeoning API fintech space is just an entry point to its pursuit of being a data company — a case he also made in February.

“The way I see it, our market is not that big. Compare the payments market now with 2016, when Paystack and Flutterwave just started. The payments space in 2016 was very small and the number of people using cards online was very small,” said Hassan, who co-founded the company with Prakhar Singh. “It’s the same thing for us right now. That’s why our focus isn’t only on open banking but data. We’re thinking of how we can power the internet economy with data that isn’t necessarily financial data. For instance, think about open data for telcos. Imagine where you can move your data from one telco to another instead of getting a new SIM card and making a fresh registration. That’s where I see the market going, at least for us at Mono.” 

Abdul Hassan (CEO) and Prakhar Singh (CTO)

He adds that the company is taking an approach of building a product one step at a time until it can fully diversify from financial data offerings, including connecting with payment gateways (Paystack and Flutterwave) and other fintechs like wealth management startups Piggyvest and Cowrywise.

“When you’re able to connect to all the systems, a lot of use cases will come up. The first step is how can we connect to all available data and open it up for businesses and developers,” he continued.

Therefore, Mono will use the funding to reinforce its current financial and identity data offerings and launch new products for diverse business verticals. Also, a long-overdue pan-African expansion to Ghana and Kenya is top priority. The last time I spoke with Hassan, the end of Q1 looked feasible to get into at least one of the two markets but it didn’t turn out that way. But the wait seems to be over as the company said it’d be going live in Ghana next month with a handful of existing customers from Nigeria and new ones in Ghana. Some of these partners include five banks (GTBank, Fidelity Bank and three unannounced banks) and the mobile money service arm of MTN Ghana.

“Our expansion is mostly inspired by our customers looking to expand to other markets, same with some of our products. We work with our customers to give them the right tools to build new experiences for their customers,” Hassan stated

Mono

Image Credits: Mono

Mono is one of the three API fintech companies to have raised a seed investment this year. Last month, another Nigerian fintech Okra closed $3.5 million while Stitch, a South African API fintech, launched with $4 million in February. Back to back investments like this show that investors are incredibly optimistic about the market. Avil Eyal, managing partner and co-founder of Entrée Capital, one of such investors, had this to say.

“We are very excited to be working with Abdul, Prakhar and the entire Mono team as they continue to build out the rails for African banking to enable the delivery of financial services to hundreds of millions of people across the African continent.”

Privacy.com rebrands to Lithic, raises $43M for virtual payment cards

When Privacy.com was founded in 2014, the company’s focus was to let anyone generate virtual and disposable payment card numbers for free.

The goal was to allow those users to keep users’ actual credit card numbers safe while allowing the option to cut off companies from their bank accounts. In an age of near-constant data breaches and credit card skimmers targeting unsuspecting websites, Privacy.com has made it harder for hackers to get anyone’s real credit card details.

The concept has appealed to many. At the time of its $10.2 million Series A last July, Privacy.com said it had issued 5 million virtual card numbers. Today, that number has more than doubled, to over 10 million, according to CEO and co-founder Bo Jiang.

“We set out to create the safest and fastest way to pay online. Our mobile app and web browser extension lets you generate a virtual card for every purchase you want to make online,” Jiang explained. “That can be especially convenient for things like managing subscriptions or making sure your kid doesn’t spend $1,000 on Fortnite skins.”

Over the years, the New York-based company realized the value in the technology it had developed to issue the virtual and disposable payment cards. So after beta testing for a year, Privacy.com launched its new Card Issuing API in 2020 to give corporate customers the ability to create payment cards for their customers, optimize back-office operations or simplify disbursements.

The early growth of the new card issuing platform, dubbed Lithic, has prompted the startup to shift its business strategy — and rebrand.

In the process of building out its consumer product, Privacy.com ended up building a lot of infrastructure around programmatically creating cards.

“If you think about the anatomy of credit/debit card transactions there’s a number of modern processors such as Stripe, Adyen, Braintree and Checkout,” Jiang told TechCrunch. “On the flip side, we’re focused on card creation and issuing, and the APIs for actually creating cards. That side has lagged the card acquiring side by five to seven years…We’ve built a lot to support card creation for ourselves, and realized tons of other developers need this to create cards.”

As part of its new strategy, Privacy.com announced today that it has changed its name to Lithic and raised $43 million in Series B funding led by Bessemer Venture Partners to double down on its card issuing platform and new B2B focus. Index Ventures, Tusk Venture Partners, Rainfall Ventures, Teamworthy Ventures and Walkabout Ventures also participated in the financing, which brings Lithic’s total raised to date to $61 million.

Image Credits: Lithic CEO and co-founder Bo Jiang / Lithic

Privacy.com, the company’s consumer product, will continue to operate as a separate brand powered by the Lithic card issuing platform.

Put simply, Lithic was designed to make it simple for developers to programmatically create virtual and physical payment cards. Jiang is encouraged by the platform’s early success, noting that enterprise issuing volumes tripled in the last four months. It competes with the likes of larger fintech players such as Marqeta and Galileo, although Jiang notes that Lithic’s target customer is more of an early-stage startup than a large, established company.

“Marqeta, for example, goes after enterprise and is less focused on developers and making their infrastructure accessible. And, Galileo too,” he told TechCrunch. “When you compare us to them, because we’re a younger company, we have the benefit of building a much more modern infrastructure. That allows us to bring costs down but also to be more nimble to the needs of startups.”

The benefits touted by Lithic’s “self-serve” platform include being able to “instantly” issue a card and “accessible building blocks,” or what the company describes as focused functionality so developers can include only the features they want.

Another benefit? An opportunity for a new revenue stream. Developers earn back a percentage of interchange revenue generated by the merchant, according to Lithic. “What we’ve noticed is a lot of folks have really big ambitions to build more of a stack in-house. We offer a path for folks by bringing more of a payments piece of the world that they can build for scale,” he said. “As a result of all these things, we end up not competing head to head with Marqeta, for example, on a ton of deals.”

The company charges a fee per card for Lithic API customers (it’s free for Privacy.com). And it makes money on interchange fees with both offerings.

For Charles Birnbaum, partner at Bessemer Venture Partners, the shift from B2C to B2B is a smart strategy. He believes Lithic is building a critical piece of the embedded fintech and payments infrastructure stack.

“We have been big fans of the Privacy.com team and product since the beginning, but once we started to see such strong organic growth across the fintech landscape for their new card processing developer platform the past year, we just had to find a way to partner with the team for this next phase of growth,” he said.

Index Ventures partner Mark Goldberg notes that as every business becomes a fintech, there’s been an “explosion” in demand for online payments and card issuance.

“Lithic has stood out to us as being the developer-friendly solution here — it’s fast, powerful and insanely easy to get up-and-running,” he said. “We’ve heard from customers that Lithic can power a launch in the same amount of time it takes an incumbent issuer to return a phone call.”

Lithic plans to use its new capital to expand the tools and tech it offers to developers to issue and manage virtual cards as well as enhance its Privacy.com offering.

White Star Capital launches new $50M crypto/blockchain fund backed by Bpifrance, Ubisoft

White Star Capital, better known as a VC which, in its time, has backed the likes of Digg, launchrock, Meero, Summly, and Tier, among others, is moving into the hot world of crypto and blockchain with a new $50M Digital Asset Fund.

The special-vehicle fund will specialize in investing in crypto-networks and blockchain-enabled businesses and was previously going to be $30 million before raising more backing. Both Bpifrance and Ubisoft are among those institutions backing the new fund.

The fund will be run by New York-based General Partner Sep Alavi and supported by Principals Thomas Klocanas in New York and Sanjay Zimmerman in Toronto. The will deploy between $500,000 and $3.0 million in initial investments into 15-20 companies with a focus on North America and Europe.

Alavi said: “We are hyper-focused on this space and we expect to see further innovative use cases such as crypto credit, DeFi, NFTs, metaverses and more manifesting at an accelerated pace… With this fund, We are actively investing in crypto protocols, infrastructure, privacy, financial, gaming, and social use cases.”

The fund has already made six investments including; dfuse, Multis, Paraswap, Rally, Safello, a European crypto brokerage that went public on the Nasdaq First North stock exchange on May 12, and Ledn, a global digital asset savings, and credit platform.

Yoann Caujolle, managing director of Bpifrance said: “It’s critical that emerging crypto and blockchain-enabled startups receive investment from firms and professionals who have the experience and knowledge to help drive their businesses forward,” said “We’re pleased to partner with the Digital Asset Fund team for bringing their support and vision into the French and European blockchain and digital asset ecosystem.”

Over a call, Alavi told me: “White Star is investing across three funds, obviously our fund one, fund two, and in this new specialized Digital Asset Fund. Historically we’ve invested in enterprise and consumer businesses, we’ve not done any, any blockchain, but for two years ago we’ve been looking at this sector. And we believe that this merits its own dedicated vehicle. I’ve been personally been investing in blockchain the blockchain ecosystem since 2015 and bring your five-plus years of domain expertise and then I was able to build a team around this new fund.”

“We are, we’re looking at the three main verticals in this sector. The protocol layer, the infrastructure layer, and the application layer. That’s the kind of high-level thesis. The protocol layer is where we invest in tokens, because it’s important to mention that the fund will also hold tokens as investments as well as equity. On top of that, we’re pretty much agnostic and opportunistic. We see great use cases in decentralized finance. We see some great use cases in the NFT space and have made investments there as well. As long as we’re true to those three verticals that I mentioned, we will capture great value there.”

Advanced tax strategies for startup founders

As an entrepreneur, you started your business to create value, both in what you deliver to your customers and what you build for yourself. You have a lot going on, but if building personal wealth matters to you, the assets you’re creating deserve your attention.

You can implement numerous advanced planning strategies to minimize capital gains tax, reduce future estate tax and increase asset protection from creditors and lawsuits. Capital gains tax can reduce your gains by up to 35%, and estate taxes can cost up to 50% on assets you leave to your heirs. Careful planning can minimize your exposure and actually save you millions.

Smart founders and early employees should closely examine their equity ownership, even in the early stages of their company’s life cycle. Different strategies should be used at different times and for different reasons. The following are a few key considerations when determining what, if any, advanced strategies you might consider:

  1. Your company’s life cycle — early, mid or late stage.
  2. The value of your shares — what they are worth now, what you expect them to be worth in the future and when.
  3. Your own circumstances and goals — what you need now, and what you may need in the future.

Some additional items to consider include issues related to qualified small business stock (QSBS), gift and estate taxes, state and local income taxes, liquidity, asset protection, and whether you and your family will retain control and manage the assets over time.

Smart founders and early employees should closely examine their equity ownership, even in the early stages of their company’s life cycle.

Here are some advanced equity planning strategies that you can implement at different stages of your company life cycle to reduce tax and optimize wealth for you and your family.

Irrevocable nongrantor trust

QSBS allows you to exclude tax on $10 million of capital gains (tax of up to 35%) upon an exit/sale. This is a benefit every individual and some trusts have. There is significant opportunity to multiply the QSBS tax exclusion well beyond $10 million.

The founder can gift QSBS eligible stock to an irrevocable nongrantor trust, let’s say for the benefit of a child, so that the trust will qualify for its own $10 million exclusion. The founder owning the shares would be the grantor in this case. Typically, these trusts are set up for children or unborn children. It is important to note that the founder/grantor will have to gift the shares to accomplish this, because gifted shares will retain the QSBS eligibility. If the shares are sold into the trust, the shares lose QSBS status.

QSBS tax strategy

Image Credits: Peyton Carr

In addition to the savings on federal taxes, founders may also save on state taxes. State tax can be avoided if the trust is structured properly and set up in a tax-exempt state like Delaware or Nevada. Otherwise, even if the trust is subject to state tax, some states, like New York, conform and follow the federal tax treatment of the QSBS rules, while others, like California, do not. For example, if you are a New York state resident, you will also avoid the 8.82% state tax, which amounts to another $2.6 million in tax savings if applied to the example above.

This brings the total tax savings to almost $10 million, which is material in the context of a $40 million gain. Notably, California does not conform, but California residents can still capture the state tax savings if their trust is structured properly and in a state like Delaware or Nevada.

Currently, each person has a limited lifetime gift tax exemption, and any gifted amount beyond this will generate up to a 40% gift tax that has to be paid. Because of this, there is a trade-off between gifting the shares early while the company valuation is low and using less of your gift tax exemption versus gifting the shares later and using more of the lifetime gift exemption.

The reason to wait is that it takes time, energy and money to set up these trusts, so ideally, you are using your lifetime gift exemption and trust creation costs to capture a benefit that will be realized. However, not every company has a successful exit, so it is sometimes better to wait until there is a certain degree of confidence that the benefit will be realized.

Parent-seeded trust

One way for the founder to plan for future generations while minimizing estate taxes and high state taxes is through a parent-seeded trust. This trust is created by the founder’s parents, with the founder as the beneficiary. Then the founder can sell the shares to this trust — it doesn’t involve the use of any lifetime gift exemption and eliminates any gift tax, but it also disqualifies the ability to claim QSBS.

The benefit is that all the future appreciation of the asset is transferred out of the founder’s and the parent’s estate and is not subject to potential estate taxes in the future. The trust can be located in a tax-exempt state such as Delaware or Nevada to also eliminate home state-level taxes. This can translate up to 10% in state-level tax savings. The trustee, an individual selected by the founder, can make distributions to the founder as a beneficiary if desired.

Further, this trust can be used for the benefit of multiple generations. Distributions can be made at the discretion of the trustee, and this skips the estate tax liability as assets are passed from generation to generation.

Grantor retained annuity trust (GRAT)

This strategy enables the founder to minimize their estate tax exposure by transferring wealth outside of their estate, specifically without using any lifetime gift exemption or being subject to gift tax. It’s particularly helpful when an individual has used up all their lifetime gift tax exemption. This is a powerful strategy for very large “unicorn” positions to reduce a founder’s future gift/estate tax exposure.

For the GRAT, the founder (grantor) transfers assets into the GRAT and gets back a stream of annuity payments. The IRS 7520 rate, currently very low, is a factor in calculating these annuity payments. If the assets transferred into the trust grow faster than the IRS 7520 rate, there will be an excess remainder amount in GRAT after all the annuity payments are paid back to the founder (grantor).

This remainder amount will be excluded from the founder’s estate and can transfer to beneficiaries or remain in the trust estate tax-free. Over time, this remainder amount can be multiples of the initial contributed value. If you have company stock that you expect will pop in value, it can be very beneficial to transfer those shares into a GRAT and have the pop occur inside the trust.

This way, you can transfer all the upside gift and estate tax-free out of your estate and to your beneficiaries. Additionally, because this trust is structured as a grantor trust, the founder can pay the taxes incurred by the trust, making the strategy even more powerful.

One thing to note is that the grantor must survive the GRAT’s term for the strategy to work. If the grantor dies before the end of the term, the strategy unravels and some or all the assets remain in his estate as if the strategy never existed.

Intentionally defective grantor trust (IDGT)

This is similar to the GRAT in that it also enables the founder to minimize their estate tax exposure by transferring wealth outside of their estate, but has some key differences. The grantor must “seed” the trust by gifting 10% of the asset value intended to be transferred, so this approach requires the use of some lifetime gift exemption or gift tax.

The remaining 90% of the value to be transferred is sold to the trust in exchange for a promissory note. This sale is not taxable for income tax or QSBS purposes. The main benefits are that instead of receiving annuity payments back, which requires larger payments, the grantor transfers assets into the trust and can receive an interest-only note. The payments received are far lower because it is interest-only (rather than an annuity).

IDGT Estate tax savings

Image Credits: Peyton Carr

Another key distinction is that the IDGT strategy has more flexibility than the GRAT and can be generation-skipping.

If the goal is to avoid generation-skipping transfer tax (GSTT), the IDGT is superior to the GRAT, because assets are measured for GSTT purposes when they are contributed to the trust prior to appreciation rather than being measured at the end of the term for a GRAT after the assets have appreciated.

The bottom line

Depending on a founder’s situation and goals, we may use some combination of the above strategies or others altogether. Many of these strategies are most effective when planning in advance; waiting until after the fact will limit the benefits you can extract.

When considering strategies for protecting wealth and minimizing taxes as it relates to your company stock, there’s a lot to take into account — the above is only a summary. We recommend you seek proper counsel and choose wealth transfer and tax savings strategies based on your unique situation and individual appetite for complexity.