Dilution vs. Risk taking: Capital gains taxes and entrepreneurs

Recent proposals to tax unrealized capital gains or wealth have sparked a debate on their impact on entrepreneurship. The debate centers on the effects of accrual-based taxation, which presents two opposing outcomes for founders: increased dilution for successful founders due to advance tax payments, and tax credits for unsuccessful founders that act as insurance. Data on U.S. venture capital deals show that founder returns are highly skewed, with a small percentage capturing the majority of total value. Transitioning from realization-based to accrual-based taxation could reduce founder ownership at exit by 25% on average but increase the fraction receiving positive payoffs. The choice between tax systems depends on founders' risk aversion levels, with less risk-averse founders favoring the current system and more risk-averse founders preferring accrual-based taxation.