This paper provides new measures of the payoff distribution faced by founders of VC-backed start-ups in the United States and uses them to evaluate reform proposals to the taxation of capital gains discussed recently. In a first step, we combine novel data on the funding rounds, pre-exit valuations, and exit values of start-up firms with information on the firms’ ownership structure contained in the capitalization tables submitted to the U.S. Securities Exchange Commission. We focus on the skewness of this distribution and, in particular, its power law property at the top. In a second step, we use these measures to quantify the effects of alternative reforms to the taxation of capital gains. Currently, capital gains are taxed only upon realization, but recent proposals involve the taxation of unrealized gains (either through accrual-based taxation or a wealth tax). Such a regime change, even when holding the tax rate unchanged, dilutes the founders’ ownership share pre-exit, thus significantly reducing their payoff in case of success. At the same time, it provides insurance by effectively allowing founders to cash out early in case of failure. Finally, we embed these results in a dynamic occupational choice model to quantify the effects of these tax policy proposals on entry into entrepreneurship.

Florian Scheuer is the UBS Professor of Economics of Institutions at the University of Zurich and Chairman of the Department of Economics. He was previously on the faculty at Stanford University, a Visiting Professor at Harvard University and UC Berkeley, and a National Fellow at the Hoover Institution. He obtained his PhD in Economics from MIT in 2010. Professor Scheuer’s research connects the fields of public finance, economic theory, macroeconomics and political economy. In particular, he has studied the policy implications of rising inequality. His work has been published in the American Economic Review, the Journal of Political Economy, the Quarterly Journal of Economics and the Review of Economic Studies, among other journals. He was awarded a Starting Grant from the European Research Council for his project “Inequality: Public Policy and Political Economy” in 2017 and a Consolidator Grant from the Swiss National Science Foundation (ERC replacement scheme) for the project “Taxing Capital Gains” in 2023. Florian Scheuer is Director of the Review of Economic Studies and was Co-Editor of Theoretical Economics from 2018 to 2022. He is also Co-Director of the Working Group on Macro Public Finance (MPF) at the National Bureau of Economic Research (NBER) in Cambridge and serves on the Council of the European Economic Association. In 2021, he was awarded the Hermann Heinrich Gossen Prize for the best economist in German-speaking countries under the age of 45.