Introduction to QSBS

The four magic letters of startup liquidity: QSBS

QSBS stands for Qualified Small Business Stock and it is the single most generous tax break in America today.

The people who benefit the most from QSBS? Startup founders, employees and investors.

This is a guide outlining everything you need to know about QSBS as a startup founder.

Overview

Here’s the TL;DR for everything in this doc:

QSBS is the single most generous tax break in America for startup founders, employees and investors. You pay no taxes on $10M of gains.
You should understand how QSBS eligiblity works early on as a startup founder early on so as to not accidentally mess something up.
It’s mostly a waiting game — you have to wait 5 years for your shares to be eligible. If you sell before then, you can do a QSBS rollover.
When your business grows — and it’s looking likely that your company will be worth a lot of money, you can look into gifting shares and setting up trusts to “stack” or multiply your QSBS exemption.

To visualize how powerful this is, consider this range of outcomes for a founder who owns 20% of her business and sells her company at different price points:

Sale Price	Your Share Pre-Tax	Net of Federal Taxes without QSBS	Net of Federal Taxes with single QSBS	Net of Federal Taxes with 3x Stacked QSBS	Net of Federal Taxes with 5x Stacked QSBS
$50,000,000	$10,000,000	~$7,620,000	$10,000,000	$10,000,000	$10,000,000
$100,000,000	$20,000,000	~$15,240,000	~$17,620,000	$20,000,000	$20,000,000
$200,000,000	$40,000,000	~$30,048,000	~$32,860,000	~$37,620,000	$40,000,000
$500,000,000	$100,000,000	~$76,200,000	~$78,580,000	~$83,340,000	~$88,100,000

If they are in a state with no state income tax or in any of the 40+ states that respect QSBS, your take-home is the same as the numbers above.