What is the current state of QSBS and how is it evolving?

I'll go into the applicability of QSBS first to give some background.

The QSBS provision was put in in 1993 to really spur investments in startups. The idea here is you want to incentivize individuals to start companies, and you want to incentivize investors to invest in companies. QSBS was put in for that reason. Now, when it was initially put in, it used to be a 50% exclusion. That means you could only exclude 50% of the total gain. After the '08 crash, in 2009, Congress bumped up this exclusion to 100% to spur more investments in small companies.

Since then, pretty much every year after that, it’s been extended. In 2015, the Obama administration made this a permanent 100% exclusion. This is a very interesting concept. I think there needs to be some history behind this in order to properly discuss what's happening right now in Congress or what the proposal is.

A few weeks ago, the House Ways and Means Committee -- aka the few people in Congress who are going to propose these changes -- put out a proposal to reduce this 100% exclusion back down to 50% for those in the $400k or more bracket. This $400k or more bracket has been what Biden has been going after: “tax the rich,” right? Anyone making $400k or greater should be paying more taxes.

This actually came as a surprise. When Biden initially announced the tax changes earlier this year -- or his proposal -- QSBS was not in the crosshairs. When the House Ways and Means Committee released their proposed changes last month, it was in the crosshairs. Very, very interesting that they decided to go after these individuals. The proposal was to reduce the QSBS to 50% for those making $400k or more. The killer here is that, for a lot of us who own QSBS stock, they propose that all sales on or after September 13, 2021 -- which is the date they released the proposal, of course -- will be affected. It’s retroactive. Meaning that, “Hey, you hold QSBS. You can't sell it today and try to get the full 100% exclusion.”

Now, before I go to my spiel and discuss this in more detail, I just want to emphasize to everyone here that a proposal doesn't necessarily mean law. I'm not saying go out there and freak out right now. We have a long way to go. There are a lot of things happening in Congress. This doesn't necessarily mean it's going to happen. It's just a proposal Congress has put out there. Just like, for those of you who follow tax changes, earlier this year Biden proposed a change in the capital gains tax, doubling it. We of course didn't see that happen. I just want to make sure to emphasize that it is not yet law.

I think it's important to talk about what I'll call -- maybe not the loopholes, but -- the significant advantages of QSBS that people in our industry have historically taken advantage of. I think it's really important, and I think most of us are going to be interested in partaking in some of these, hopefully.

First and foremost, with QSBS, there are a couple of very interesting things you can do. First off, I want to address the fact that investors can get QSBS. This applies on an individual level. If you think of a VC fund, it’s typically organized as a partnership.

We're going to start the Conor and Vieje Fund, and three other people decide to join us in that fund, so we have five partners in this fund. We're going to invest in Sacra. Sacra has less than $50 million in assets, I believe. For the purpose of example, let's assume so. We buy the stock, and the company goes to the moon -- an amazing investment for all of us. It's worth $101 million. Our $1 million investment has turned into $101 million.

Because QSBS applies at the individual level, each of us can exclude $10 million worth of gain on that investment. Conor, you get a $10 million exclusion; I get a $10 million exclusion; and our three partners also get a $10 million exclusion. This is a very generous exclusion. It's not just the first $10 million in that company, but a $10 million split between multiple partners. It’s very important to address that because, quite frankly, the majority of the people who benefit from QSBS are investors and not typically founders or employees.

The second piece is what we call QSBS stacking. There’s this concept of QSBS stacking that is very interesting. I would love to partake in this in the future if I'm still lucky enough and Secfi has a potential exit one day. Effectively, QSBS stacking is turning that first $10 million exclusion into multiple $10 million exclusions. What do I mean by that?

I buy my Secfi stock, and it’s QSBS. The company grows like crazy, and my stock is worth more than $10 million. I’m like, “Okay, well, crap. If I sell it, I only get to exclude the first $10 million. I'm going to get creative here. I'm going to QSBS stack." What I’m going to do is: I'm going to gift $10 million worth of stock to my kid, and I'm going to gift $10 million worth of stock to a trust for a future kid who doesn't exist today. You get the idea, right? The idea here is that each of those individuals I gifted stock to take $10 million of exclusion. Collectively, as the Piauwasdy clan, instead of taking the first $10 million exclusion, we now have converted this to multiple $10 million exclusions. You can technically gift it to anyone -- it doesn't have to be family members, but that’s typically what you see.

This is a very popular thing for the ultra-wealthy in Silicon Valley. I was reading an article about this yesterday, and you can't really walk down Palo Alto without someone who has QSBS stacked. I think that may be a little exaggerated, but at the same time, it’s a real thing.