Thread by @dunkhippo33

Today's tweet thread is about Qualified Small Business Stock (QSBS). At a high level, what is it? Why should you care? Who benefits?

Thanks @gamingfordev for the topic!

Note: I'm not a lawyer or tax preparer, so please consult your own counsel for advice & details on QSBS.

1) There's a lot of talk right now in the US about potential changes in long-term capital gains tax.

But for early stage founders, employees, and startup investors, QSBS is way better! And right now, QSBS laws are here to stay.

2) So what is QSBS? The financial crisis of 2009 hit SMBs hard. So QSBS tax rules came about to incent people to invest in SMBs.

Namely, the US gov wanted ppl to invest (either in time or $$) in the earliest stages of new companies & hold onto stock in those investments.

3) So, these QSBS rules are incredibly favorable if you like to get involved in companies early and like to hold for the long term.

If you meet all the criteria, you will be charged *$0* in US federal taxes on liquidated stock of early stage companies you've held onto for yrs.

4) So what's the criteria? You've bought stock in a co:

-Worth < $50m in valuation
-That is a US C Corp
-And have held onto said stock for 5+ years

(there are more details but this is the gist)

This applies to buying stock as an investor or via exercising stock options.

5) So let's say I'm an early employee at a startup that has raised a seed round. Company was valued at $15m post-money valuation.

I exercise my vested options today to buy my stock. 7 years later, the company sells for a lot. Say I make $2m.

I would pay $0 in federal taxes.

6) That's right - you pay NO federal taxes!

7) To be clear, you still pay state taxes if your state has state taxes but this is a really nice gift. (and if your state doesn't tax you on income, even better!)

The US gov incentivizes people to get involved in startups and stay committed for the long haul.

8) This doesn't apply to:

-late stage investing / or joining a late stage company.

-or int'l cos. If you are in the US & invest in a UK co at the seed & it sells for $1B and you held onto the stock for 5+ years, sorry, you have to pay taxes on that.

9) There is also fine print around how much tax is shielded depending on when you bought the stock (before 2010 or not) and how much you made on the deal (< $10m) etc...

But more or less, this is a gift to all founders, early stage employees, & investors who find a rocketship.

10) In addition, there is healthy debate amongst investors whether investing on a SAFE starts the 5 year clock or whether the 5 year clock only starts when the SAFE converts to equity.

Consult your own counsel on this. I've heard ppl argue both sides.

11) But on the whole, QSBS is a great gift, and who cares about long term capital gains -- QSBS is even better for those who like getting involved in early stage startups.