Here’s how that works: imagine that I incorporate Badger Forge and value it at $10,000 – the value of the used scrap-cost of my gear. Badger Forge is now a legal entity, it’s just not worth very much. But, Badger Forge hires stable genius knife-maker Marcus Ranum, who agrees to work in return for stock! For just 50% of the shares in Badger Forge, Marcus Ranum will come work there and make messes on the floor. Badger Forge issues a press release (on Instagram) declaring that Marcus now works there! Badger Forge, declares that its hiring of Marcus Ranum makes the company worth $100 million! Marcus’ shares are now “worth” $50 million but Marcus owes no tax on the shares unless he somehow sells them. See how that works? If Marcus holds the shares for more than a year, the tax-rate on any profits he realizes on the shares is capped as capital gains. In the meantime, Marcus can drink Cristal and drive a Lamborghini if – and only if – he can find a bank that is stupid enough to buy those shares. But, if Marcus is like Donald Trump, what he does is goes to Deutsche Bank and borrows $10 million (in real cash!) against the value of the $50 million Badger Forge shares. The $10 million is put in a Grand Cayman bank account and some of it is used to buy Lamborghinis and hookers, propane and a new lathe, and the rest is used to pay the debt service to Deutsche Bank. That’s illegal – that part about using borrowed money to pay off a loan – so if I was Donald Trump I’d get another loan using my $100,000 CNC milling machine (bought with the $40 million) and use that money to service the debt.
