How to Navigate Qsbs Tax Considerations

Most founders will hand the IRS millions at exit. Not because they have to. Because they didn’t plan. Here’s what Qualified Small Business Stock (QSBS) changes: Section 1202 allows founders to exclude up to $10M in capital gains from federal taxes when selling qualified stock. Zero tax on: - Capital gains - Net Investment Income Tax (3.8%) - Alternative Minimum Tax But here’s the catch most founders miss: You need to file an 83(b) election WITHIN 30 DAYS of receiving restricted stock. This starts your 5-year holding period clock immediately, even before your shares vest. Miss this deadline, and you could lose millions in tax savings. The 3 critical requirements: → Your company must be a domestic C-Corp → You must hold the stock for 5 years minimum → Gross assets under $50M at issuance ($75M for stock issued after July 4, 2025) Example: A founder with a $2M basis could potentially exclude up to $20M in gains (the greater of $10M or 10x your basis). Always work with your Tax Advisor! Are you planning your exit strategy with QSBS in mind?

A few more hard earned lessons about early exercise of options and QSBS (Qualified Small Business Stock) for early stage startup employees, as follow up to my last post ➤ Early exercise is a huge benefit for early startup employees as it helps a lot with taxes and unlocks the QSBS benefit. You purchase both vested and unvested shares upfront. If you leave before all your shares vest, the unvested portion is repurchased by the company at your original strike price. ➤ Long-term capital gains rates: with early exercise you start the long term capital gains clock. ➤ Eliminates the spread problem: the delta between strike price and FMV (Fair Market Value) at the time of exercise. If your strike price is $1 but the FMV is $10 at the time of exercise, you still only pay $1 per share but the $9 of spread is added as an adjustment in the calculation of the Alternative Minimum Tax (AMT). ➤ The problem of spread can be exacerbated by a 90-day exercise window (you have 90 days to exercise your options after leaving the company) as you might be in a situation where are subject to AMT for illiquid stock. Early exercises eliminates this problem 💡 The main reason to not exercise early is the risk of losing the money but if you don’t believe in the company to use the early exercise benefit maybe you should not be there ➤ From options to QSBS: founders and investors purchase their shares directly from the company so their stock is QSBS. Employees, need to exercise their options while the the corporation is QSB. The company must allow early exercise or they vest and exercise some options before the $50M asset line has been crossed ➤ Your shares qualify as QSBS is you buy them directly from a domestic C-corporation with gross assets of $50M or less at the time of stock issuance (practically means to have raised less than $50M) ➤ $10M exclusion: The main benefit of QSBS is the exclusion of up to $10M in gains (or 10x your basis if it's more) from federal taxes. ➤ 5-Year holding requirement: to unlock the tax benefits ($10M tax exclusion), you must hold the stock for at least five years 💡 Gifted shares maintain the QSBS eligibility. That combined with the fact that the exclusion is per tax entity it means that if you gift QSBS shares to your parents or kids trust funds, etc. they get their own exclusion 💡 In an acquisition, if stock gets involved, that is usually organized as a tax-free stock exchanged. The acquirer stock you get in exchange for your QSBS inherits the benefits. This is important if at the time of the acquisition the 5 year requirement was not yet satisfied at the time of the transaction ➤ Rollover of QSBS: in certain situations, you can roll over your QSBS gains into another QSBS-eligible investment, deferring taxes. For example, when investing at a startup after selling your QSBS All this only matters upon success but it's an important benefit to early employees

If you're a startup founder, you need to know about QSBS—and it's recently gotten substantially better. QSBS stands for "Qualified Small Business Stock", and it basically says: If you have stock in a startup that was issued 𝘣𝘦𝘧𝘰𝘳𝘦 𝘵𝘩𝘦 𝘤𝘰𝘮𝘱𝘢𝘯𝘺 𝘩𝘢𝘥 $50𝘮 𝘪𝘯 𝘢𝘴𝘴𝘦𝘵𝘴 𝗮𝗻𝗱 you hold it for >5 years, and then you sell it, you don't have to pay 𝗮𝗻𝘆 federal tax on the first $10m in gain. (It's a huge tax savings for founders, early employees, and investors, if you hold for 5+ years.) As of July 4, the rules have changed:  • The asset cap is now $75m (rather than $50m)  • The exclusion cap is now $15m rather than $10m (if you hold for 5+ years)  • There's now tiering: if you sell after 3 years, you can get 50% of the exclusion. After 4 years, 75% of the exclusion, and after 5 years, 100% of the exclusion. These changes only apply to shares issued after July 4, 2025. (Shares issued before then are subject to the old rules.) You don't need to do anything proactive now to "elect" QSBS, but you need to be aware of it so that you take advantage of it when you sell. My guess is that, in a few years, this will be very meaningful for founders taking some money off the table as part of a Series B or similar (where the shares had probably not yet hit the 5-year mark, but where it still makes sense to get some liquidity.) The only place I might consider taking action now: if you very very recently formed the company and issued yourselves shares, it might be worth chatting with your lawyer about whether there's anything you can do to get them considered under this new QSBS regime rather than the old one.

Founders and Investors: You might be sitting on a major tax break -- without even realizing it. If you own stock in a qualified early-stage startup, you could be eligible for the Qualified Small Business Stock (QSBS) exemption, which can save you millions in taxes when you sell your shares. TLDR: ✅ If you hold C-corp stock in a U.S. startup for at least 5 years, ✅ And the company was valued under $50M when you got in, ✅ You might be able to avoid 100% of capital gains tax (up to $10M or 10x your investment). This is huge, yet so many founders and early employees don’t realize it until it’s too late. What to do now: 🏛 Make sure your company is structured as a C-corp. (LLCs don’t qualify.) 🗂 Keep detailed records of when you received your shares and the company’s valuation. 📅 Plan exits strategically to take full advantage of the 5-year rule. Even if you’re years away from an exit, knowing about QSBS now can save you a fortune later.

The new tax law (the "Beautiful Bill") changed the game for startup founders & early employees. No, it didn't repeal AMT. 😂 Although, the new bill does make the higher AMT exemptions established in 2017 permanent. 💡 This helps to retain flexibility with a multi-year exercise strategy for ISOs. One big change involves a small section of the tax code - Section 1202. This section refers to 𝗤𝘂𝗮𝗹𝗶𝗳𝗶𝗲𝗱 𝗦𝗺𝗮𝗹𝗹 𝗕𝘂𝘀𝗶𝗻𝗲𝘀𝘀 𝗦𝘁𝗼𝗰𝗸 (𝗤𝗦𝗕𝗦). It became a powerful section of the tax code for individuals who hold stock in qualifying companies due to the ability to exclude taxes on up to $10M of gains. However, the previous rules limited the QSBS eligibility due to smaller company size and a longer holding period requirements. Under the new tax law, the following changes were made: 🔽 𝟭. 𝗦𝗵𝗼𝗿𝘁𝗲𝗿 𝗵𝗼𝗹𝗱𝗶𝗻𝗴 𝗽𝗲𝗿𝗶𝗼𝗱𝘀: Partial tax exclusions kick in at 3 years (50%), 4 years (75%), and 5 years (100%). Prior to this new law, the exclusion 𝙤𝙣𝙡𝙮 applied if you held shares for over 5 years. 𝟮. 𝗕𝗶𝗴𝗴𝗲𝗿 𝗲𝘅𝗰𝗹𝘂𝘀𝗶𝗼𝗻 𝗰𝗮𝗽: The per-taxpayer gain exclusion jumps from $10M to $15M (and will adjust for inflation). 𝟯. 𝗟𝗮𝗿𝗴𝗲𝗿 𝗰𝗼𝗺𝗽𝗮𝗻𝘆 𝗲𝗹𝗶𝗴𝗶𝗯𝗶𝗹𝗶𝘁𝘆: The asset threshold for qualifying companies increases from $50M to $75M. (Note: Asset threshold ≠ Company valuation) One of the biggest misconceptions I hear regarding QSBS - for early employees who were granted 𝙨𝙩𝙤𝙘𝙠 𝙤𝙥𝙩𝙞𝙤𝙣𝙨 when the company was eligible, this does 𝗻𝗼𝘁 mean you qualify. The holding period begins when you 𝙖𝙘𝙦𝙪𝙞𝙧𝙚 𝙨𝙩𝙤𝙘𝙠 (i.e. you exercise the option to purchase shares). As with other financial & tax planning strategies, the best outcomes typically take place when you start planning early! 😊

A $32 billion acquisition. A dream exit. And potentially, a massive tax mistake. Last week, Google announced its plans to acquire Wiz for $32 billion. For the founders and early employees, this should be life-changing. But here’s where things get tricky. If they aren’t careful, they could lose hundreds of millions to taxes. Why? Because of two limiters that almost every founder and early employee overlook. The 5-year hold & $10M cap of Qualified Small Business Stock (QSBS). If the original stock was acquired before Wiz hit $50M in gross assets, it could be 100% tax-free. But there’s a catch… The stock had to have been held for 5 years. Since Wiz was founded in 2020, it is possible that some of the early shareholders have not hit the 5-year mark. For shareholders who have not hit the 5-year hold period, they are on a very short shot clock for the only solution. QSBS Rollovers. With a 60-day IRS deadline, shareholders can roll their gains into new QSBS stock—deferring taxes and keeping the dream alive. Given the size of this exit, it is also worth calling out QSBS expansion via rollovers. When you make more than $10M, you can use rollovers to expand the QSBS exclusion cap infinitely.

You might be sitting on a $10 million tax break—and not even know it. One of our clients—a founder planning to exit in 3–5 years—was about to convert to an S corp for tax efficiency. We ran the numbers: Staying a C corp and holding Qualified Small Business Stock (QSBS) could save them $8.7M in capital gains taxes at exit. 💡 QSBS is a powerful tax benefit that lets you exclude up to $10M (or 10x your investment) in capital gains when you sell stock in a qualified C corp held for 5+ years. So why do some owners consider switching to an S corp? ✅ To avoid double taxation on profits ✅ To take advantage of pass-through taxation ✅ For simpler year-to-year tax treatment But here’s the tradeoff: S corps don’t qualify for QSBS. Once you convert, that exclusion is off the table—permanently. 👉 The structure you choose today impacts what you keep when you sell. If you’re within 5–7 years of a sale, now’s the time to start thinking about it. Happy to be a sounding board if you’re sorting through the options.

If I were starting a company with a founding team and $0 today, here’s what I’d do from Day 1 Because most people obsess over equity splits But the founders who actually keep more? They think about taxes early Here’s what I’d do the moment we incorporated: 1. File as a C-Corp QSBS only applies to C-Corps - miss this and you miss out on millions in tax-free upside 2. Set the par value as close to $0 as possible Low par value means you can issue more shares at a low cost and keep the paper trail clean 3. Issue restricted stock to the full founding team This is how you start the QSBS clock and the earlier you start it, the earlier that 5-year window closes 4. File 83(b) elections immediately No 83(b)? No QSBS. It’s that simple File it within 30 days of issuing equity or you lose the chance 5. Avoid priced rounds early if possible Once a priced round sets a high valuation, it’s harder to issue QSBS-eligible shares Act before the cap table gets crowded --- This is the stuff most people find out after an exit But if you’re early (and you’re building something valuable), this one decision could save your team millions If you want the full checklist, we use to help founders qualify for QSBS Comment “QSBS” and I’ll send it over (must be connected to receive it)