If you’re a California-based startup getting ready for a Series C or pre-IPO round , one thing is guaranteed your investors will ask tax questions. Not just federal ones. They’ll want to know your California compliance status, especially if you’ve got deferred compensation, unfiled franchise tax reports, or unclean trust/equity structures.
Whether you’re working with a Big Four due diligence team or a lean legal counsel, California state tax items can delay or derail your IPO or M&A event if not handled early.
This blog covers the top California tax items VCs care about, how to prepare for them, and how to avoid common red flags that appear during diligence.
Why California Tax Exposure Matters for IPOs
VCs and underwriters are prioritizing:
- Franchise tax liabilities
- PIT sourcing on equity comp
- Sales tax exposure on SaaS revenues
- Unclaimed property risks
- Trust/shareholder structuring
- Deferred tax disclosures
Any issues here could trigger delays, repricing, or even deal collapse. And California is aggressive with FTB, SCO, and EDD all watching.
Key California Tax Areas VCs Will Ask About
- California Franchise Tax (Form 100/100S)
Have you been filing your CA Franchise Tax Returns every year? Even if your startup was pre-revenue, California imposes a minimum $800 franchise tax.
Red flags:
- Missing CA Form 100s or 100S
- Incorrect apportionment for SaaS, services, or multi-state operations
- Failing to pay final year tax during corporate shutdowns or reorgs
- Equity Compensation & PIT Withholding
California requires PIT (Personal Income Tax) withholding on certain non-qualified stock options (NSOs) and RSU payouts under R&TC §18663.
What VCs check:
- Were NSOs exercised by CA residents without withholding?
- Did the company correctly withhold taxes on RSUs/bonuses?
- Any open EDD or FTB audit notices?
- Unclaimed Property Compliance
If your startup failed to report old liabilities (SAFE payouts, vendor checks, RSUs), you may be in violation of California’s Unclaimed Property Law.
VC diligence will flag:
- No Holder Notice Report filed
- No participation in the VCP
- Inconsistencies in acquisition schedules
- Trusts, Grantors & Shareholding Entities
California may treat trusts holding founder shares as separate taxpayers creating double taxation risk at exit unless trust structure is correct.
Investors will ask:
- Who holds the shares you or your trust?
- Is the trust revocable or irrevocable?
- Has CA Form 541 been filed properly?
- Sales Tax on Digital Revenue
Even if your startup sells SaaS or online tools, California may claim sales or use tax nexus.
Watch for:
- No sales tax registration despite CA customers
- Failure to file CA sales/use tax returns
- Misclassification of software vs. services
Real Example: $5M Price Adjustment After FTB Risk Found
A San Diego-based AI firm prepping for IPO had never filed a Form 100, and owed 4 years of unpaid CA franchise tax and penalties. Investors caught it during diligence. The valuation was adjusted by $5M to cover back liabilities and risk buffer.
Step-by-Step: Clean Up for IPO
- Pull a CA Compliance Transcript
- Check your Form 100/100S history
- Look for outstanding notices from FTB or EDD
- Audit Your Cap Table & Trust Ownership
- Identify any trusts, foreign shareholders, or deferred options
- Confirm tax withholding history
- File Unclaimed Property Reports
- If needed, enter California’s VCP before audit risk increases
- Review CA Sales & Use Tax
- Determine if your SaaS, digital goods, or marketplace platform triggered sales tax nexus
- Document All Corrections
- Maintain a clean audit trail for VCs and underwriters
Forms & Codes to Know
| Form | Purpose |
|---|---|
| Form 100 / 100S | CA Franchise Tax Return (Corp / S-Corp) |
| DE 34 | Report of new hires to EDD |
| UFS-1 / UFS-2 | CA unclaimed property reports |
| Form 541 | Fiduciary return for trusts |
| Form 592 / 592-B | PIT withholding for non-residents |
Conclusion: Be IPO-Ready Before They Ask
If your California compliance is messy, you’re not IPO-ready and your investors will notice. These issues aren’t just red tape; they’re financial exposures that affect valuation, closing timeline, and founder payouts.
Get ahead of the diligence by reviewing your CA tax exposure now, and fixing it before you get the term sheet.
Speak With a Tax Strategist
Anshul Goyal, CPA EA FCA is a U.S. licensed Certified Public Accountant, IRS Enrolled Agent, and California tax strategist for VC-backed startups and founders. He works with companies preparing for:
- IPO readiness
- Pre-acquisition diligence
- Trust/equity cleanup
- Sales tax filings and apportionment
Schedule a private review session
Disclaimer
This article is for informational purposes only and does not constitute tax or legal advice. Please consult a qualified CPA or attorney to review your situation. Information is accurate for the tax year and may be subject to change.
FAQs: IPO Tax Readiness in California
- Do I need to file CA Franchise Tax even if I had no revenue?
Yes. California requires a minimum $800 franchise tax regardless of income. - Will CA tax stock option income before IPO?
If the options are NSOs or RSUs and exercised by a CA resident, withholding may apply. - What is the VCP and should I enter it before an IPO?
The Voluntary Compliance Program lets you fix past unclaimed property issues before they become audit problems. Yes, it’s recommended before IPOs or exits. - What if my shares are held in a trust?
Ensure the trust is properly structured and disclosed. Improper trust filings can trigger double taxation in California. - Is SaaS subject to CA sales tax?
In some cases, yes. Depends on how your product is structured and billed.
About Our CPA
Anshul Goyal, CPA EA FCA is a U.S.-licensed CPA, IRS Enrolled Agent, and Fellow Chartered Accountant. He supports startup founders and VCs with tax compliance, IPO readiness, and FTB/IRS coordination, particularly for Delaware and California-based companies.
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