What is the idea behind 1045 rollovers and how does it enable investors to maximize their gains from QSBS?

Essentially a 1045 is a deferral of gain from the sale of QSBS. Pretty interesting provision, because it works in tandem with QSBS. Long story short, this allows someone to do two things.

One, if you have QSBS stock and you haven't held on to it for five years, you're able to take advantage of this section and roll over your QSBS into another company. Let's just say, Conor, that you own Sacra stock. It’s presumably QSBS. You're going to grow the company, and in one year, you sell the company. Unfortunately, you haven't held on to the Sacra stock for five years. You go, “Oh crap, I'm going to have to pay taxes on this. What can I do?”

Well, one of those methodologies is to take advantage of the 1045, which is a deferral of gain on a sale. You can roll over your Sacra proceeds into other QSBS stock within 60 days. Then you'll be able to maintain the holding period. When you eventually sell that QSBS stock -- the new QSBS stock -- you'll be able to take advantage of it, and you won't have to pay tax on your Sacra stock. If you're under the five-year limit, this 1045 is a godsend.

Secondly -- and probably what you were alluding to -- a lot of people like to take advantage of this QSBS rollover in order to turn $10 million into multiple $10 million exemptions. This is all legal. It's what this provision in the code is meant to do. Let's use you as an example again, Conor,. Sacra continues to grow. You have an amazing exit. You have a $10 million exclusion when you sell the stock or when your company goes public, whatever it is. Let's just say, for ease, you sold the stock. You have $10 million, and you say, "Okay, great, I can take this. I can reinvest it." So you can take that QSBS stock, reinvest it in other corporations. Let's say you take that $10 million and start 10 new companies that all qualify for QSBS. You can roll over that cash effectively into multiple $10 million exemptions. You're converting all the proceeds from one QSBS stock into multiple QSBS stocks. If each of those companies then exit, you can take $10 million in each.

It's pretty interesting. I think really the setup here is for early-stage VCs when their portfolio company gets acquired, and they haven't hit that $10 million exemption, they can reinvest in other startups and roll things over. That's the gist of it there.

It works very closely with the idea of QSBS stacking. But just so everyone knows, this does apply, and it applies mostly to people who don't have a five-year holding period.