Last week, I finished reading At Random: The Reminiscences of Bennett Cerf. It’s Bennett Cerf’s autobiography, and it details how Cerf founded and grew book publisher Random House. Cerf was a colorful entrepreneur who lived an exciting life. Being one of the few people who influenced the distribution of knowledge by choosing what books to publish put him in a unique position. If Cerf and other publishers didn’t publish a particular book, the public never had the opportunity to read it. People were attracted to him and his influential knowledge distribution, which allowed him to build relationships with notable people, including U.S. presidents and movie stars.

Cerf founded Random House in 1927, and he died in 1971. Things have changed drastically since then. Companies such as Scribe Media and Amazon’s Kindle Direct Publishing now make it easy for authors to publish their books. More books are being published, but discovery is more challenging for books that don’t have significant marketing resources.

After reading Cerf’s book and thinking about how the industry has changed, it’s clear to me that people who curate and help others discover books can bring immense value to readers. Those who excel at this can build powerful magnets that attract others to them. By attracting others to them, they will likely also attract unique opportunities and build relationships with notable people like Cerf did. Said differently, curation and helping others with discovery is a way to create magnetic luck.

I had a great conversation with someone who archives and preserves documents for a living. A big part of their work involves digitizing documents and publications. A few takeaways from the conversation:

• Commercial-grade book scanners are the way to go. They can generate an image or text file, or both, when they scan a book.
• Discoverability is an important consideration. Tagging and metadata are important to enhancing discoverability.
• Ensuring consistency in the information collected across publications is important. Thinking through the metadata schema is an essential upfront exercise.
• Using distinct identifiers, i.e., authority control, helps keep data clean and enhances discoverability.  
• I need to learn what ontology is and how it relates to my project.  
• Open-source digital repository software programs such as DSpace are popular and have active communities.

The conversation gave me a glimpse of what archivists do and how they think about their work. It was helpful regarding my personal project, which is looking more like a data project.

After writing about the Newhouse family’s estate tax strategy and taxes being a successful entrepreneur’s biggest expense, I wanted to share what I’ve learned about qualified small business stock (QSBS) and the tax strategy around it.

To be clear, I’m not a fan of avoiding taxes or tax scams. You can go to jail for stuff like that, and it’s never worth it. But the tax code is complicated. Many aspects of it are designed to encourage entrepreneurship, but people aren’t aware of them. I know about QSBS only because I have a few friends who sold companies and benefited from it, minimizing their taxes.

Why is QSBS a big deal?

Eligible shareholders of qualified small businesses can get up to a 100% exclusion from capital gains taxes when they sell their company. Translation: you can pay zero taxes on the gains, up to certain level, when you sell your company.

What are the criteria for a business to qualify for the QSBS tax exclusion?

• The business must be incorporated as a C corporation in the United States (LLCs and S corps don’t qualify).
• Company gross assets must be $50 million or less before and at the time the stock was issued.
• Eighty percent of the company’s assets must be used for qualified trade. Businesses such as real estate and farming are excluded.
• Stock must be purchased directly from or issued directly by the company. Secondary purchases and stock transferred from other shareholders don’t qualify.
• Stock must be held for at least five years to get the maximum benefit from QSBS tax exemption.

If a company qualifies for QSBS, how does the tax exemption work?

If the criteria are met, each shareholder is excluded from paying taxes on gains of up to $10 million or ten times their basis. The simplest example is that if you launch a company, meet the QSBS criteria, and sell it, your gains on that sale, up to $10 million, are tax free. Gains above $10 million are taxed at capital gains rates.

More complicated scenarios can result in the exclusion amount being significantly more than $10 million. In this example, the founders converted a company to a C corporation years after launching, when company assets were $40 million. This meant their stock basis was $40 million and they got an exclusion of ten times that cost basis—that is, up to a $400 million exclusion. The entire $400 million isn’t excluded, which the article covers, along with other details, but you get the idea. It can get even more complicated with stacking and other factors.

QSBS is part of the tax law and something all founders should be aware of. If your goal is to build a company and exit after more than five years, QSBS is something to consider in your tax strategy.

This isn’t tax advice, and everyone should do their own research to figure out whether QSBS applies to their situation. I just wanted to make more people aware of the exemption.

Current Project: Reading books about entrepreneurs and sharing what I learned from them

Mission: Create a library of wisdom from notable entrepreneurs that current entrepreneurs can leverage to increase their chances of success

Cumulative metrics (since 4/1/24):

• Total books read: 33
• Total book digests created: 12
• Total blog posts published: 189
• Total audio recordings published: 103

This week’s metrics:

• Books read: 1
• Book digests created: 0
• Blog posts published: 7
• Audio recordings published: 0

What I completed this week (link to last week’s commitments):

• Read the autobiography of Bennett Cerf, founder of book publisher Random House

What I’ll do next week:

• Read a biography or autobiography
• Locate a second commercial-grade book scanner locally
• Finalize talking points for the next podcast series

Asks:

• None

Week two hundred thirty-seven was another week of learning. Looking forward to next week!

Current Project: Reading books about entrepreneurs and sharing what I learned from them

Mission: Create a library of wisdom from notable entrepreneurs that current entrepreneurs can leverage to increase their chances of success

What I struggled with:

• Locating a commercial-grade book scanner took some work, and gaining access to one has been more challenging than I expected. I’ll need to get creative and scrappy.

What I learned:

• Large companies store a lot of data, but often it’s not structured or organized. To reap the full potential of AI, companies are realizing the need to structure and organize their data—a massive undertaking.
• Google’s NotebookLM has become very popular in the last two weeks, even though this tool has been out for months. The new feature that sparked this wave of attention is the ability to “listen to a conversation about your sources.” You upload your own documents and NotebookLM creates a podcast conversation between two people. The conversation is an analysis of the content in your uploaded documents. The AI is doing two things. First, it’s synthesizing the content in your documents. But what people are energized about is listening to the synthesis in a storytelling format. Hearing a story is the way most people learn best. This feature leans into that facet of human nature and makes NotebookLM appealing to a broader audience.

Those are my struggles and learnings from the week!

I recently met an entrepreneur who started his business earlier this year. It’s gone from zero to over $5 million in monthly revenue in just nine months. By the end of 2024, he’ll likely be doing $9 to $10 million in monthly revenue, well over a $100-million-annual-revenue run rate. That’s insane growth in one year.

I was super curious about his journey. During our chat, I learned he has no background in the industry and didn’t know it existed 18 months ago. I was curious how he learned about the problem. It turned out he’d encountered it personally and searched for a solution. He hit a brick wall. Every local company he called couldn’t solve the problem for six months or more. After his searches, he was bombarded with online ads. It was an abnormally high number of online retargeting ads, which caught his attention. Still needing a solution, he tried one of the online companies. It delivered and solved his problem, but the experience was awful.

As a customer, he zeroed in on two things. First, given the number of retargeting ads he was seeing from various companies, there must be an enormous business opportunity. Second, customer demand was so high that people happily put up with terrible customer experiences offered by low-quality companies. He concluded that massive demand and low customer expectations likely meant this market was exploding—ideal for a start-up. Clearly, he was right.

I had lunch with an entrepreneur friend. We talked about what his next company will look like. He isn’t sure what the company will do or the space it will be in, but he’s crystal clear on the kind of people he wants to work with: people he calls “grinders.” They work hard, create no drama, and win. Their goal isn’t to be praised regardless of the quality of their work; it’s to do great work and win by making customers happy.

I thought about this more later in the day and texted him some thoughts about also wanting people who are learners. His replies went deeper than I was thinking. He wants people who have a “diverse track record of success” that “shows they can figure things out.” And then he made a sports analogy that I love. Alluding to a successful recruiting strategy that college football coach Urban Meyer used to win three national championships at two schools, he said he wants to work with multisport athletes.

“Diverse track record of success” stuck with me. To have one, a person has to do several things. First, put in the work to learn new things: learn the rules of a new game, learn new skills required to compete, etc. Second, figure out how to apply what they’ve learned. Learning is nice but not valuable if you can’t apply it. Last, compete at a high level. To my friend’s point, anyone who demonstrates this is someone I want to work with.

I was thinking about yesterday’s post and the Newhouse family’s strategy for reducing their estate tax liability. The fact that they had a tax strategy, and the results, stuck with me and reminded me of a tax conversation I had.

A successful entrepreneur once pointed out that taxes are a successful entrepreneur’s biggest expense, yet most spend less than 1% of their time thinking about them. They don’t have a strategy or defined actions around taxes. Most entrepreneurs spend time scrutinizing and optimizing their biggest business expenses on their profit-and-loss statement but don’t do the same with taxes. He believes this is a big mistake and that founders should spend some percentage of their time, say 5%, on their tax strategy every year. Doing so can have a material impact on business finances and the ability to reinvest in growth opportunities.

Regardless of how you feel about Newhouse's estate tax strategy, the result highlights that an effective tax strategy can indeed have a material impact on a business. To be clear, I don’t believe in tax dodging or doing shady things to avoid paying taxes. That’s just silly and can land you in jail. But I think there’s something to be said about having more of the capital your company generated available to reinvest in growth.

I finished reading Newspaperman: S.I. Newhouse and the Business of News by Richard H. Meeker. The biography is about Samuel Irving Newhouse Sr., who founded Advance Publications. At Sr.’s death, Advance Publications owned multiple newspapers and Condé Nast, which publishes famous magazines such as Vogue, Vanity Fair, GQ, and The New Yorker. Since then the company has grown rapidly, and it owned 26.5% of Reddit when Reddit began trading on the public stock market this year (see here, page 194). Reddit’s market capitalization (i.e., valuation) is just under $12 billion as of this writing.

This book and Newhouse: All the Glitter, Power, & Glory of America's Richest Media Empire & the Secretive Man Behind It by Thomas Maier detail one key strategy the Newhouse family used to grow their wealth: they optimized their tax liability and maximized the compounding of their wealth. The family studied the tax laws and implemented strategies that reduced their tax liability. This gave them more capital to reinvest in growing their companies or acquiring new companies.

Both books contain numerous examples. Their estate tax strategy especially caught my attention. When someone dies, their estate is transferred to heirs and a tax is due on the value of the estate being transferred if it exceeds that year’s federal threshold. When Sr. died in 1979, his sons filed a return valuing his ownership in Advance Publications at roughly $182 million and showing an estate tax due of roughly $49 million. The IRS said his estate was worth somewhere between $1 billion and $2 billion and that the estate tax due was, at a minimum, $600 million, and as high as $1.2 billion. At the time, Advance Publication owned thirty newspapers and various magazines. Its two most prosperous newspaper properties alone were worth more than $182 million.

Sr. had studied other publishing families to understand how death and estate taxes negatively impacted their family empires. Families often had to sell all or some of the company’s assets to pay the estate tax upon the founder’s death. Sr. developed a dual-share-class strategy to avoid that outcome. Sr. owned common shares in Advance Publications but issued preferred shares to his siblings, wife, and sons. His common shares carried voting rights and, essentially, control of company decision-making, but the preferred shares gave holders the right to vote on a company liquidation or sale. Said differently, if a buyer wanted control of the company, the buyer had to get the approval of the preferred shareholders first. The result was a gray area in the tax law. It could be argued that the fair market value of the company—the price a willing buyer and seller would transact at—was significantly lower than the IRS’s figure because there would be fewer buyers willing to buy a minority stake in a family-owned company that had such a bizarre ownership structure. Most buyers spending that kind of money would want majority ownership so they could have control. To gain control, they’d have to convince multiple family members to sell, a prospect many buyers would rather avoid. There’s more to this, but that’s the gist of it.

The IRS took the family to court, and the family prevailed. The result was that the family paid an estate tax bill that was a fraction of what it would have been if Sr. hadn’t planned so carefully. It wasn’t a material amount for the company, so it didn’t have to sell any assets to pay the tax. The Newhouse family’s empire could continue compounding for another generation and grow exponentially under Samuel “Si” Newhouse Jr.’s leadership for the next forty years.

I’m continuing to read a biography of Samuel Irving Newhouse Sr. that describes the empire he founded with Advance Publications. Newhouse was in the media business. He started with newspapers but expanded into magazines, broadcast television, and cable systems before he died in 1979.

Newhouse was in the business of providing information to people, but he was adamant that the information must be unrelated to him. He went to great lengths to make sure there was no reporting on him. Sr. had a “genuine, abiding mistrust of the press,” according to the book.  

I’m sure he had his reasons. I’d imagine a big one was that he didn’t want to be perceived negatively, as most people don’t. Negative publicity could have made his empire-building difficult and his family uncomfortable. Maybe Sr. realized it’s easier to manage public perception if it doesn’t exist. If people don’t know who you are, there’s nothing to manage.

We’ll never know why Sr. was adamant about avoiding publicity, but given his business, I found his disdain for the press noteworthy. And it may have been influential, since his son Samuel “Si” Newhouse Jr. and other descendants felt the same way.