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What Is QSB Stock and Why Does It Matter for Startups?
- jeremyt 9y agohttps://jeremytunnell.com/2015/04/29/a-guide-to-section-1202-tax-benefits-for-entrepreneurs/ https://jeremytunnell.com/2015/04/29/a-guide-to-section-1202...
- lafay 9y agoWealthfront states it more clearly here: https://blog.wealthfront.com/qualified-small-business-stock-2016/ https://blog.wealthfront.com/qualified-small-business-stock-... It’s a major benefit if you have the opportunity to early exercise your shares.
- abhinai 9y agoWhere can I find out if this applies to founder stocks as well? And as a founder what can I do to qualify for this?
- rdl 9y agoIt 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.)
- sk5t 9y agoWhat 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?
- URSpider94 9y agoNon-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.
- jsjohnst 9y ago> 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.
- URSpider94 9y agoSorry, 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.
- rdl 9y agoFounder shares and pre-seed are often pre the first valuation and at a nominal corporate valuation of $100 or $1000 total. I've written checks for $30-50 before. A $10mm Series A valuation is likely going to be something like $10k for 1% of the common. $10k is a lot of money, but if I believed in a company enough to take a Series A 1% role I'd probably do $10k. It's better to get in right before a valuation change, of course -- it might have been 6mo since a 409a valued the company at $3mm.
- sulam 9y agoHow are RSUs a good idea here? It seems like they wouldn’t start the 5-yr clock until liquidity.
- rdl 9y agoRestricted Shares (founder shares, etc.) are not RSUs. They are just regular common shares subject to a buyback provision (reverse vesting)
- rdl 9y agoThere 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.
- abalone 9y agoIs 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)?
- jkuria 9y agoThanks 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!
- CalChris 9y agoI 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.
- rdl 9y agoVenture Deals is better for the financing/legal terms.
- Sujan 9y agoIs there a European/German equivalent for this?
- lostboys67 9y agothere is a one off allowance for business owners in the uk 10 mill I seem to recall
- chillydawg 9y agoUK 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.