Startup Hungary

A wealth tax extended to startup equity will destroy the ecosystem.

The draft wealth tax places a disproportionate burden on the founders of venture-backed startups and can push them into insolvency.

If the regulation ignores the risk profile, investment structures and valuation specifics of startups, unicorns will never replace the zebras. Anyone building an innovative, internationally scaling company from Hungary will be put in an impossible position.

Signatories

Founders, investors and ecosystem members who support the proposal.

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Why is the wealth tax a problem for startups?

  1. You cannot pay tax on wealth that cannot be realised

    Startup founders' equity is encumbered by investor rights, cannot be sold, pays no dividends, and is statistically likely never to be realised. With slight exaggeration, it is like having to pay tax on the jackpot of a lottery ticket before the draw.

    Proposal: startup founders' equity should not count toward private wealth until it is actually realised through an exit.

  2. The valuation method is unclear

    The draft values non-listed shares either by formula or by independent company valuation. The formula-based valuation probably cannot be used with shareholder agreements, shares with different rights, or a foreign parent company — yet these are the default cases for venture-backed startups.

    Proposal: the default formula should also apply to foreign parent companies and venture capital agreements.

  3. The investor's money is not the founder's money

    Funding rounds go into the company's equity, and the part spent on intellectual property stays on the balance sheet as a capitalised asset. The formula therefore taxes the investors' money at the founder: after a USD 40 million seed round, a 60% founder would pay about HUF 17 million in wealth tax per year; after a USD 100 million Series A, a 55% founder would pay about HUF 55 million — several times their annual salary.

    Proposal: investors' liquidation preference should be deducted from the value of equity.

  4. Unpredictable startup valuations

    The price of a funding round prices future opportunities, not current performance. Miro, valued at USD 17.5 billion in 2022, was acquired this year for USD 1.36 billion. If the independent valuation used the price of the last funding round as the tax base, a 60% founder would pay about HUF 191 million per year at a USD 100 million valuation, and a 55% founder about HUF 2.25 billion per year at a USD 1 billion valuation.

    Proposal: funding round prices should not be mandatorily decisive in the independent valuation.

Calculations assume a loss-making company, no other assets, and an exchange rate of HUF 335 per USD.