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Software giant Adobe plans to buy enterprise design application maker Figma for approximately $20 billion in a 50/50 cash-and-stock split. The deal is slated to close in 2023, subject to regulatory approval and other conditions.
Adobe is famous for making content-creation software like Photoshop, Acrobat, and Illustrator, and for inventing the Portable Document Format (PDF). It has been around since 1982, but in 2021 its revenue was nearly $16 billion, and its headcount was just shy of 26,000.
Figma, a 10-year-old privately held company, is best known in interface-design circles for a collaborative web application of the same name. According to media reports, Figma raised $333.4 million in seven funding rounds between mid-2013 and early 2022. In April 2020, it was valued at $2 billion. A year later its implied valuation jumped to $10 billion. Now, of course, Adobe has doubled that.
Adding Figma should give Adobe’s media business the means to “reimagine end-to-end product design in the browser while building new tools and spaces to empower customers to design products faster and more easily,” says Figma co-founder and CEO Dylan Field.
So, what does the merger with Adobe mean for Figma employees? Well, it depends on how long they’ve been at Figma, and what they do there. And it hinges on something called “qualified small business stock,” or QSBS which calls for an introduction.
QSBS is a category of shares in a small business under Section 1202 of the Internal Revenue Code. The issuer has to be a “C” corporation with assets worth less than $50 million when the stock is issued.
This category of stock enjoys favorable treatment for capital gains purposes. How favorable depends on when the investor — who can’t be a corporation — acquired the QSBS and how long they held it.
Figma employees who exercised their stock prior to February 2019 may be eligible for QSBS tax treatment, which could save them millions of dollars in taxes. If qualified, the first $10M of gains from the sale of the stock are excluded for federal tax purposes. However, to qualify, employees must have also held the stock for at least 5 years, which means that employees would need to have exercised their stock sometime in 2018 or before to get QSBS tax treatment on the initial sale proceeds (assuming the transaction closes in 2023). Importantly though, the QSBS qualification should roll over into the Adobe stock, so if an employee exercised stock in December 2018 and the acquisition closes in June of 2023, they may still be able to qualify for QSBS tax treatment on the sale of the Adobe stock as long as they do not sell the Adobe stock until after December 2023 (5 years after the original Figma stock was acquired).
For employees with more than $10M of QSBS, there are ways to further extend the tax benefits. Gifting the stock to a beneficiary through an irrevocable non-grantor trust, creates a new $10M tax exclusion.
Additionally, if the QSBS stock is used to fund a new QSBS eligible entity, such as a new start up, employees may qualify for an additional $10M QSBS exclusion.
The idea is to gift QSBS shares to the trust early — presumably at a lower valuation — so they use as little of the donor’s lifetime gifting limit as possible while minimizing the tax consequences of inter-generational wealth transfers.
It’s also true that qualified small businesses don’t always have stellar exits. Protecting your QSBS in an irrevocable non-grantor trust gives the holding more time to grow in value.
Figma QSBS owners interested in trust-based strategies face another challenge at the state level. Although most states conform to federal QSBS guidelines, a few — California, New Jersey, and Pennsylvania, for example — don’t honor capital-gains exclusions under Section 1202. As a result, many QSBS owners opt to establish their irrevocable non-grantor trusts in states that recognize relevant federal exemptions. Nevada and Texas, which don’t levy state income taxes, are favored locales for this strategy.
Another financial consequence of Adobe’s acquisition of Figma for employees is the Adobe stock they will receive in the transaction. Some employees will receive a substantial number of shares.
Concentrated stock holdings like this make your portfolio less diverse, throwing off the balance of your asset allocation and subjecting it to more risk and volatility.
Fortunately, Cerity Partners is experienced in time-tested strategies for softening the adverse impacts of concentrated and QSBS positions. Besides gifting, these can include monetization and hedging strategies such as:
As a QSBS-eligible Figma employee, you are on the precipice of life-changing wealth. As a wealth manager with enduring ties to the innovation economy and a long history of helping employees navigate mergers, Cerity Partners is ready to help you make the most of your company stock grants — pre-merger, post-merger, and beyond.
Myles is a Partner based in the San Francisco office. He provides investment and financial planning advice to help clients achieve their short- and...Read more
Cerity Partners is not contracted with, endorsed by or affiliated with Figma.
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