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.

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.

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.

As I understand Newhouse: All the Glitter, Power, & Glory of America’s Richest Media Empire & the Secretive Man Behind It, its author, Thomas Maier, said the Newhouse family was in the business of providing information to Americans. They owned magazines, newspapers, and cable systems, but newspapers were the empire's backbone. Growth potential was capped, but profit margins and cash flow were fat.

For many years, newspapers were the best way to distribute localized information, so they captured the attention of many readers. The Newhouses recognized this and executed a local monopoly strategy. Newhouse newspapers were often the only paper in town—the only way consumers could read local news. The papers, which had the attention of an entire community, were a microphone with which to talk to it. Companies paid a premium for the right to use the microphone to speak to the community, which drove highly profitable advertising revenue. Once a local monopoly was established, it was hard to compete with. It would generate predictable revenues and cash flows for years and wouldn’t require much reinvestment from the Newhouse family. The result was an annual stream of cash that the family invested into other businesses.

The book was first published in 1994 so it doesn’t capture how the internet disrupted their local monopoly strategy, but I’d imagine it negatively impacted their newspapers as it did the rest of the industry. The internet made information more readily available and made it easier for companies to reach consumers in a specific community. Meta (Facebook), Alphabet (Google), and others are now enormous companies and still growing quickly. Much of their revenue comes from advertising, which went to newspapers before the internet era.

The Newhouse family still has an empire, but I’m pretty sure that newspapers are no longer its backbone. I’m curious about how the family adjusted their strategy to respond to the internet’s impact and about what business is now the empire’s backbone. The Newhouse family’s companies aren’t publicly traded so information isn’t available via the SEC, but I’ll do some research and see what I can find.

Brett Pulley’s The Billion Dollar BET: Robert Johnson and the Inside Story of Black Entertainment Television chronicles Robert “Bob” Johnson’s journey, his highs, and his lows.

Bob wasn’t a well-rounded founder and didn’t have a well-rounded founding team. Bob had deficits, but he shrewdly got around them to navigate unfamiliar waters. Some people work on their weaknesses. Bob took a different approach: he leaned on his strength, relationships (he was a lobbyist). Here are a few examples:

Satellite

After launching, Bob wanted BET’s programming to expand from six hours a week to 24/7. Through his cable relationships, he learned that HBO had unused satellite capacity. It was worth $2–$3 million a year, money Bob didn’t have. Bob negotiated a deal with HBO: it took a 15% stake in BET in exchange for the satellite time. HBO was owned by Time Inc., a major cable system, so Bob was now partnering with two large cable systems, Time Inc. and TCI (i.e., John Malone). And BET was a 24/7 network.

Sales & Marketing

Bob had no sales or marketing staff, so he struggled to sell advertising or convince cable operators to carry BET. His relationship with Time Inc. solved this problem. For $450,000 a year, Time agreed to manage BET’s marketing and affiliate sales using experienced HBO employees. This deal jump-started BET’s charging per-subscriber fees to cable systems, a new revenue stream. BET also leveraged Time Inc.’s lawyers for negotiations and its engineers for developing BET’s technical skills. After several years, BET gained expertise in these areas. The partnership ended in 1988. Bob hired a sales leader and built a sales team. By 1991, BET reached 53% of US homes wired for cable and reported $50 million in annual revenue and $9.3 million in annual profit.

Finance & Capital Markets

Bob knew nothing about raising money or about capital markets, which put him at a resource disadvantage. Luckily, his first investor, John Malone, was a financial engineer and master capital allocator who sold TCI to AT&T for $48 billion. Bob sought his counsel on capital-related issues. Malone was instrumental in Bob using savvy tactics in the early years, such as paying interest on $8 million of debt by issuing additional BET shares while not diluting Bob’s or Malone’s stakes. Malone planted the idea of BET capitalizing on a booming stock market by going public. He coached Bob through the IPO process, and the company’s stock began trading on NYSE in 1991. He helped Bob navigate BET buying Time Warner’s equity for a discounted $58 million (it was worth $191 million two years later). And he advised Bob to take the company private again, which he did in 1998 at a $1 billion valuation. Malone was at Bob’s side for the pinnacle of his career: negotiating and selling BET for $2.3 billion in stock to Sumner Redstone and Viacom.

Bob’s tactic of leaning in to his natural strength—relationships—was masterful. Using the expertise and assets of his partners kept him from wasting time and making mistakes while simultaneously lessening his weaknesses.

You can listen to audio versions of my blog posts on Apple here and Spotify here.

This weekend I read Brett Pulley’s The Billion Dollar BET: Robert Johnson and the Inside Story of Black Entertainment Television. Pulley details Robert “Bob” Johnson’s path from poor kid from Mississippi to cofounder of BET and billionaire.

When Bob landed John Malone’s investment in BET, he’d never run a business. He asked Malone for advice (after getting the investment check). Malone was direct: “Get your revenue up and keep your costs down.”  Bob took that advice to heart and combined it with a mercenary founder mentality to find a profitable content strategy.

Bob couldn’t afford to produce content on par with broadcast networks like NBC and CBS. He needed something else. Music videos were the new craze, but Black artists weren’t being played on MTV. BET got promotional videos from record labels free of charge and aired them. Viewers loved them, and artists loved getting national exposure.

Bob had hit on a winning strategy: Find a form of entertainment with high Black demand not being satisfied by other networks and a large supply of Black talent. By connecting supply to demand, he added value to both sides. Also important was that the talent valued the national exposure it couldn’t get anywhere else and didn’t expect much, if any, compensation. Bob had found a highly profitable content strategy.

ESPN launched and was a success. Bob noticed that ESPN didn’t broadcast games played by Black colleges. BET began broadcasting football and basketball games from well-known Black colleges such as Grambling and Jackson State. He made sure to broadcast the half-time performances of school marching bands and dance teams, something Black communities enjoy to this day. BET could broadcast games for less than $15,000 per game, while networks like ABC paid up to $50,000 per game. Black colleges enjoyed the national exposure, viewers enjoyed watching games they couldn’t watch anywhere else, and BET got exclusive low-cost programming.

Bob also noticed there were many talented but undiscovered comedians. BET launched ComicView, and the show became one of its most successful shows ever. The show propelled the careers of now-famous comedians such as D.L Hughley, Cedric the Entertainer, and Kevin Hart. Keeping costs down was taken too far, though. The result was a mini public relations crisis. BET learned from this and modestly increased pay to comedians and moved production from Los Angeles to Atlanta, whose comedians were plentiful and non-union. A one-hour episode of ComicView cost $18,500 to produce—while “inexpensive” half-hour sitcoms cost big networks $500,000 an episode and hits like Friends cost over $6 million an episode.

Bob’s focus on entertainment content gained him critics in the Black community. But his goal was clear: generate profits and become wealthy. He aligned his content strategy with that goal. Advertisers were paying BET rates that were less than half of those they paid MTV and other networks, yet when Viacom acquired BET for $2.3 billion in 2000, BET’s profit margins were the highest in the industry and strongly influenced Sumner Redstone’s decision.

You can listen to audio versions of my blog posts on Apple here and Spotify here.

After reading The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success, I wanted to learn more about the CEOs profiled in the book. I was especially interested in Henry Singleton, given that Warren Buffett likely borrowed from Singleton’s playbook when building Berkshire Hathaway.

Singleton didn’t do many interviews, and no one has written a biography about him. I managed to dig up Distant Force: A Memoir of the Teledyne Corporation and the Man Who Created It. It’s hard to find, but I got lucky and started reading it.

Singleton went on an acquisition spree during Teledyne’s early years in the 1960s. Two things likely led to Singleton embracing this strategy and making it so effective:

• The stock market valued Teledyne richly in the 1960s, and Singleton shrewdly took advantage. He used Teledyne’s stock as currency. Teledyne traded at a double-digit P/E multiple ranging between thirty to seventy times earnings (i.e., high valuation) as a public company, while smaller, private companies were valued at single-digit P/E multiples of roughly nine times earnings (i.e., lower valuations). Singleton recognized this arbitrage and paid for his acquisitions using overvalued Teledyne stock.
• World War II took place mostly in the 1940s. New technologies were created, and many small companies were founded to help the war effort. After the war, veterans benefited from the G.I. Bill, receiving tuition-free college educations, from which they learned new technologies and methods. This combination of newly educated and tech-savvy veterans and a wave of new technology led to a boom in entrepreneurship in the 1940s and 1950s. By the 1960s, many of these small companies had matured, and the founders were ready to sell or needed growth capital to reach the next level.

Singleton’s genius was in recognizing that he was positioned to benefit from twin tailwinds. Two forces were occurring simultaneously, and he crafted a strategy to take full advantage of both. There was a large supply of entrepreneurs interested in being acquired, and he could fund acquisitions using richly valued Teledyne stock instead of cash. His strategy led to over one hundred companies being acquired in a decade and Teledyne growing from $4.5 million in revenue and $58,000 in profit to $1.3 billion in revenue and $60 millions in profit annually by the end of the acquisition spree.

You can listen to audio versions of my blog posts on Apple here and Spotify here.

In every entrepreneurial story I’ve heard, luck played a role to one degree or another. I’m a big believer in luck, and I think it’s possible to manufacture your own luck.

I’m finishing reading The Almanack of Naval Ravikant by Eric Jorgenson. This book shares Naval’s thinking around several types of luck:

• Blind luck – Something completely out of your control happened, and it benefited you.
• Persistence luck – You’re taking actions that set things in motion and result in something happening to you. Think working hard, hustling, or shaking a bunch of trees to see what happens. You’re creating forces that could generate a lucky break.
• Spotting luck – You’re knowledgeable in a field and able to spot a lucky break in that field. Your specific knowledge allows you to see and understand what’s happening before others do.
• Magnetic luck (my wording, not his) – You’ve built something that attracts others, who’ve gotten lucky, to you. You might have a unique brand or specific skill. People want to be associated with that brand or need your skill set to help them capitalize on an opportunity.

The first three types of luck are straightforward. The fourth is the “hardest kind of luck” to get.

I’m a fan of persistence luck and magnetic luck. Both are good ways to manufacture luck that anyone can take advantage of. A big difference between the two is the time frame. Persistence luck often optimizes for luck in the short term. You can take action tomorrow, and you might get lucky tomorrow. But magnetic luck is the “hardest kind of luck”—a long-term game. You’re building something, maybe a reputation or skills, over time. This requires commitment. But when this work is done, luck goes from being something that happens by chance to, as Naval says, “your destiny.”

If you’re interested in this book, it’s available for free. You can download the e-book file or PDF here.

You can listen to audio versions of my blog posts on Apple here and Spotify here.