[nine_k]

So it applies to a situation when you hold stock of a company that's large enough to issue stock, but is, and has always been, small enough to never have more than $50M in assets, and you must hold the stock for at least 5 years.

How common is that?

[toast0]

Fairly common for startups that go through multiple rounds of funding.

If you invest during a seed round, chances are the funding is much less than $50M. Series A usually is much less than $50M too. Series B or C might put you over the limit, depending... but that doesn't disqualify the earlier purchases.

Meeting the holding period could be easy or hard, depending on what the company does. If it takes 5+ years between when it hits the $50M limit and when the shares are marketable, most holders will have a qualified disposition. If it's acquired and the merger terms aren't well tax managed, that may be a disposition for all holders and that sets the holding period. If it becomes marketable quickly, then some holders are likely to sell at least some shares before meeting the holding period... Avoiding capital gains tax is nice, but not nice enough to forgo realizing gains when experience has shown that stock prices can drop rapidly for a variety of reasons that may be hard to forsee.

[jandrewrogers]

The requirement was only that you acquired the stock when the company has less than $50M (now $75M) in assets. If the company now has $1B in assets, you still get the tax exclusion up to the limit on stock that was purchased back when the company was small.

It specifically advantages investment in small companies that then turn into large companies.

[jiveturkey]

not exactly. you have to acquire the stock at a time before the assets ever exceeded $50M. If the balance sheet is $51M and then goes down to $49M and then you exercise, you are not QSBS eligible.

it's that ever part that the GP got confused about. the company assets have to have never exceeded $50M before you acquire the stock, not just at the time you acquire it.

[mitchellh]

For any startup that actually reaches a sizable liquidity event of any form, it's very common.

As background: I cofounded a startup that made a lot of people millionaires. QSBS really helped a lot of people. Yeah, if you're going to make deca-millions anyways then it seems like a handout, but if you're "only" making a few million dollars it's the difference between retiring and not.

[MarkMarine]

Real Assets != valuation. How much in assets do you think the average tech startup holds?

[underyx]

This also applies for options exercised before the company reaches $50M in assets. And then the gain from a valuation from $50M to say $1B is all excluded.

[jusob]

Not just exercised, but bought before the company reaches $50M in assets.

[intuitionist]

IANAL but I believe the option has to be exercised before the company reaches $50M in assets—that’s when you buy the stock.

[jiveturkey]

just exercised

[awithrow]

A company doesn't need to be large to issue stock. Stock was issued to all the founders as part of incorporating our company. More stock was issued when we raised money.

[misiti3780]

I think a lot of founders dont know about it.