
What Is QSB Stock and Why Does It Matter for Startups? - jkuria
https://capitalandgrowth.org/questions/19/why-does-qsb-stock-matter.html?childToView=29#answer-29
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lafay
Wealthfront states it more clearly here:
[https://blog.wealthfront.com/qualified-small-business-
stock-...](https://blog.wealthfront.com/qualified-small-business-stock-2016/)

It’s a major benefit if you have the opportunity to early exercise your
shares.

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rdl
There was a fun game when the window on this was first closing -- open a bunch
of corporations, let them age a bit ("while actively doing business" of some
kind -- just not too much), and then use them for projects later. Part of the
5y clock would already be run down, but at the time, it seemed very likely
QSBS with this kind of favorable treatment wouldn't be offered again.

The other way these got used was for existing business -- it's 10x the basis
OR $10mm, whichever was larger, so there were deals where people would try to
structure a $500mm deal using $50mm of buy-in as QSBS. I'm not sure about the
details, but I remember seeing tax attorneys working on them.

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jkuria
Thanks grellas and HN! Btw, we awarded a scholarship in his name for his early
contributions to our site:

[http://info.capitalandgrowth.org/money-for-
kids/](http://info.capitalandgrowth.org/money-for-kids/)

Btw, again, grellas has over 30k karma on HN!

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jeremyt
[https://jeremytunnell.com/2015/04/29/a-guide-to-
section-1202...](https://jeremytunnell.com/2015/04/29/a-guide-to-
section-1202-tax-benefits-for-entrepreneurs/)

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abalone
Is there any reason _not_ to do this for a startup that qualifies?
Specifically are there any drawbacks if the gain exceeds the $10M maximum?

I noticed that it uses the old 28% capital gains rate, which is higher than
what it is now (15-20%). Does that mean if your startup "goes unicorn" you get
a tax break on the first $10M but you end up paying an extra 8% or more on the
rest? And therefore this is only a good structure for startups aiming for
smaller exits (hence the "small business" stock)?

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CalChris
I checked _Venture Hacks_ and they don’t mention QSB. They didn’t mention 83b
either which is strange. _Venture Deals_ doesn’t cover it either.

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rdl
Venture Deals is better for the financing/legal terms.

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abhinai
Where can I find out if this applies to founder stocks as well? And as a
founder what can I do to qualify for this?

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rdl
It does, generally. (Not legal advice, talk to a lawyer, but it's basically
the default when a natural person buys founder shares for a pittance, and a
good reason to offer restricted stock rather than options (or at least, to
offer early exercise) up to seed and Series A and possibly a little longer.)

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sk5t
What companies are selling Series A shares at "a pittance"? Presuming the
money means something to you, would you rather pay $100,000 cash for 1% of a
$10MM Series A-ready startup or pay $0 for ISOs?

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URSpider94
Non-preferred shares often sell at a very deep discount vs. the preferred
shares offered to investors. As you get closer to IPO, they have to converge
in value at 1:1. This is how startups can grant options that are nominally in
the money on grant day.

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jsjohnst
> This is how startups can grant options that are nominally in the money on
> grant day.

Say what? That has nothing to do with it. Any difference in price is do to
when the last 409a was done.

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URSpider94
Sorry, I was being intentionally obtuse.

ISO's are options on shares of common stock, which have a completely
indeterminate value in most start-ups, because they likely don't exist outside
of the company's ISO pool and the founder's stakes, and they never trade.

Investors are all buying preferred shares, which carry a liquidation
preference, sometimes a multiple of their share price. Any exit below the sum
of the outstanding preferences mean that any common stock is worth $0.

Companies take advantage of this to file 409a's saying that common stock is
worth a fraction of the latest share transaction for preferred stock. I've
seen ISO's with a strike price of 30% of the last preferred shares at Series
B. Certainly, they are worth less than the preferred shares, but are they
worth 70% less? Who can say? But - it's in the best interest of employees to
keep that value as low as possible.

On the day of an IPO, all preferred shares convert to common stock, at which
point the value has to be 1:1. In order for the company's prior 409a's to pass
an audit and not get the ISO plan disqualified, the values have to converge
smoothly leading up to the IPO.

I was being obtuse by pointing out that if you judge the gap between the value
of common shares and preferred shares to be smaller than what the 409a
dictates, then you are "in the money" on grant day. Also, a lot of start-up
employees don't understand nearly as much as I've written above about ISO's (I
know, because I was one once), and so it just looks to them as if they were
handed free money.

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Sujan
Is there a European/German equivalent for this?

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chillydawg
UK tapered capital gains relief for entrepreneurs, up to £10m. UK also has
SEIS and EIS, but that's not quite the same. Unsure about other countries, but
you usually have some kind of tax incentive to invest in small and new
companies.

