How does early exercising impact the eligibility of QSBS?

Correct. Early exercise -- meaning exercise before they invested. That qualifies.

Something to note here: “assets under $50 million” is a really important concept. This is primarily set for early-stage startups in our world. I presume most people here are in the startup world. If you run a small business, you may always be under $50 million. But in the startup world, at this point, you're probably looking at the Series A or possibly Series B level. You need to acquire the stock when the assets are less than $50 million on the balance sheet.

The second requirement that's really important: 80% of the assets of that company need to be used in a qualified trade or business. Long story short, let's ignore the 80% because most people will qualify for that. You're in a startup, and your company's going to use all the cash they've got to hopefully grow the business. I'm going to focus on the second piece of that: “qualified trade or business.” Not every company is a qualified trade or business. The code defines it as certain exclusions. If you worked at a law firm, accounting firm, financial services, or consulting, you are not a qualified trade or business.

For most startups that are working in tech, you're likely going to qualify. For others who are in financial services, if you start a law firm, you unfortunately do not qualify. Unfortunately, like most things in taxes, it isn't a black or white line. It's a little bit in the gray area. You can look at Secfi. Do we count as a financial services firm? My argument is no, but it could be the IRS may see that differently down the road.

Those are two big requirements. You get acquired stock when assets are less than $50 million, and it needs to be in a qualified trade or business. There are a few other minor requirements that shouldn't apply to most startups, and we won't go over them in this call.