What is the definition of QSBS and how does it impact the startup world?

QSBS stands for “qualified small business stock.” I won't go into all the technicalities of it -- I don’t want to make this a lecture on the tax code or anything. But long story short is, if you own QSBS, you can exclude 100%, under current law, of that gain when you eventually sell that stock.

Now, this is limited. Effectively, you own QSBS, your company has an exit, and you sell the stock. If it's qualified -- maybe you hold on to it for five years before you sell it -- you can exclude 100% of the gain. You pretty much sell that stock completely tax-free.

It's limited to the greater of $10 million or ten times basis. For those of you who don't know what basis is, think about it as what you got your options or your shares for. You paid your $1 per share; it'll be ten times the basis. But generally, your company's going to grow more than 10x hopefully. For all intents and purposes, it's limited to $10 million.

This is mainly for founders and startup employees. If you exercise and you hold QSBS, you can sell your stock five years down the road and not pay any tax up until the first $10 million. It's an amazing benefit for startup employees, founders, executives, and investors. And it has been for quite some time now.

How do you qualify to be a qualified small business stock? There’s a list of about seven or eight requirements. I'm going to highlight the two big ones that are most applicable to pretty much everyone here. The two big qualifications to qualify as QSBS. First, you need to acquire the stock when your company has $50 million or less in assets. Take that apart. Keyword: “acquire.” If you own stock options and you don't buy the stock, that is not “acquired.” If you have stock options in your company and the company is worth less than $50 million, and you exercise them, that's when you acquire the stock.