California's proposed wealth tax is causing quite the stir among Silicon Valley's elite, and venture capitalist Chamath Palihapitiya just laid out exactly why startup founders should be worried.

The Cash Flow Nightmare for Founders

Over the weekend, Palihapitiya criticized the tax proposal while responding to a post from Rep. Ro Khanna (D-Calif.). His main gripe? The structure is far more punishing than it sounds.

"It's not 1% a year for 5 years. It's a one time 5% tax on all assets and it will kill entrepreneurship in California," he wrote.

Here's where it gets interesting. Palihapitiya painted a scenario that should terrify any founder: imagine you're making a modest $150,000 salary while sitting on $1.2 billion in paper equity. Under this tax, you'd owe $60 million in actual cash.

When Paper Wealth Becomes Real Bankruptcy

But wait, it gets worse. Palihapitiya added, "Now imagine that after the tax is assessed, in early 2027, the company takes a write down to $200M. Now his share is $40M. But he still owes $60M… Should he declare bankruptcy now because he tried to start a business but was retarded enough to do it in California?"

Rep. Khanna responded by questioning whether Chamath truly believed a 1% annual wealth tax for five years would destroy Silicon Valley or if his concern was broader. Khanna emphasized that extreme wealth holders "must do more for society given the backlash and angst people feel."

Billionaires Eyeing the Exit

Hedge fund billionaire Bill Ackman jumped into the debate, warning that California's economy was at risk as some of the state's richest residents considered leaving. He criticized state leaders for policies that push out entrepreneurs, saying California was "on a path to self-destruction" and could lose key business leaders.

The concerns aren't hypothetical. Reports indicate that tech investor Peter Thiel and Google co-founder Larry Page are considering reducing or ending their California ties. Thiel has explored opening an office elsewhere and spending more time outside the state, while Page has discussed leaving entirely, with companies linked to him filing incorporation documents in Florida.

The Political Backdrop

Earlier this month, Gov. Gavin Newsom (D-Calif.) accused President Donald Trump of favoring billionaires with economic policies that left working Americans financially vulnerable.

Trump and his allies rejected the claims, citing GDP growth, falling inflation, record stock markets, and gains in retirement accounts benefiting working families.