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Back on Valencia time, mostly.

Last issue we covered freemium conversion rates. Today we’re going somewhere different.

Let’s talk about ⬇️

Quick note before we start. This is tax law, and I’m a CFO rather than a tax attorney. Everything here is the finance-side version of the decision, meant to tell you what to check and when. The actual determination goes through counsel.

The One Big Beautiful Bill Act was signed on July 4, 2025.

For QSBS, that date is now a hard line. Stock issued before it and stock issued after it follow different rules, and the gap between them runs into millions.

Stock issued on or before July 4, 2025:
Five-year holding period. All or nothing. $10M exclusion cap. $50M gross asset ceiling.

Stock issued after July 4, 2025:
Tiered holding period. 50% exclusion at three years, 75% at four, 100% at five. $15M cap. $75M gross asset ceiling.

Fifteen months on, a lot of the advice still circulating describes the old regime. If your founder’s mental model of QSBS came from a blog post or a lawyer conversation in 2023, it’s describing a set of rules that no longer applies to anything issued since.

Section 1202 lets non-corporate shareholders exclude federal capital gains tax on qualifying C corporation stock.

Not defer. Exclude. The government never taxes it.

It’s been in the code since 1993 as a deliberate policy incentive for long-term ownership in small operating companies. Which is why whole categories are carved out: law, accounting, consulting, financial services, banking, insurance, farming, hospitality, mineral extraction.

Software sits outside those exclusions. Most SaaS companies qualify at the entity level, assuming the corporate tests are met.

Entity-level requirements:

Shareholder-level:

That last line is the one people miss. Eligibility is tested at issuance and has to hold for substantially all of your holding period.

The slide: cap table summary ahead of a Series B. Clean, current, fully diluted.

What wasn’t on it: issuance dates.

Share classes, holders, percentages, option pool. No column showing when each tranche was issued.

Which means nobody in that room could tell you which shares sat on which side of July 4, 2025, or how far along anyone’s holding period clock was. Two of the three founders had tranches on both sides and didn’t know it.

The fix: one column. Issuance date, per tranche. It costs nothing and it’s the single input that determines which exclusion regime applies to every share on the page.

Step 1. Exclusion percentage.

Step 2. Dollar cap.

Per taxpayer, per issuer. The greater of:

Here’s where founders and investors diverge sharply.

A founder who paid $10,000 for common stock at incorporation has a 10x basis of $100,000. Nowhere near the flat cap. The flat limit is what protects them.

An investor who wrote a large check into a priced round may find 10x their basis exceeds $15M comfortably. For them, the basis multiple is the operative number.

Same company. Same exit. Two completely different cap calculations. Run it per shareholder class.

Step 3. Tax on what isn’t excluded.

Under the tiered 3-and-4-year exclusions, non-excluded gain is taxed at 28% rather than the standard 20%, plus the 3.8% net investment income tax.

Worked example.

Founder holds QSBS issued August 2025, purchased for $50,000. Company sells six years later for an $18M gain.

On that remaining $3M, flag an open question rather than an answer. The 28% rate applies specifically to non-excluded gain under the tiered 3-and-4-year exclusions. Gain above the cap under the 100% tier is characterized differently. That characterization needs confirming with a tax advisor on the specific facts. Don’t let a model carry an assumed rate there without someone signing off.

This is the most expensive misunderstanding in the whole topic, and it runs in both directions.

Gross assets means cash plus the adjusted basis of the corporation’s property.

Valuation is what someone will pay for the business.

They are unrelated numbers.

A SaaS company valued at $300M with a modest cash balance and few fixed assets can sit comfortably under the $75M gross asset ceiling. A capital-intensive company at a $60M valuation might be over it.

Founders disqualify themselves in their heads based on their last round’s post-money. That’s the wrong test. Run it off the balance sheet.

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If you've been reading for a while and found any of this useful, this is the version where I can actually go deep with you.

Under $50M gross assets. Every share issued today likely qualifies, assuming entity and activity tests hold. This is your highest-leverage window. New hires, option grants, additional founder stock. Each one locks in treatment before the balance sheet grows.

Between $50M and $75M. Stock issued after July 4, 2025 can still qualify under the new ceiling, even though it would have failed the old $50M test. This is the most directly useful thing OBBBA did for growth-stage companies.

Approaching or past $75M. New issuances stop qualifying. Shares issued while you were under the cap keep their status. But every new hire, every new grant, every new investor check from here misses the exclusion.

That last one is a forcing function. It changes the math on whether to raise a large round now or stage the capital. It changes how you design equity comp for the next twenty hires.

One escape hatch worth knowing. Section 1045 allows a tax-free rollover of QSBS gain into new QSBS, if you reinvest within 60 days and held the original stock at least six months. Useful for early secondary sales or partial liquidity during a later round without forfeiting the exclusion outright.

Treating it as a formation checkbox. Eligibility is a continuous test. Review it at every financing event, the same cadence as your cap table and 409A.

Confusing valuation with gross assets. Covered above. Calculate from the balance sheet before assuming anything.

Waiting until the LOI. By the time a deal is live, issuance dates and holding periods are fixed. Nobody fixes a five-year clock with three months to close.

Assuming preferred and common work the same. The 10x basis alternative behaves differently at different price points. Calculate the cap separately per class.

Treating a late C corp conversion as cleanup. If the company started as an LLC, the holding period generally starts at conversion, not at founding. Confirm the date and tell every equity holder, because it moves everyone’s clock.

Assuming it happens automatically inside the accounting stack. QSBS sits across legal structuring, cap table management, and forecasting. At $5M to $50M ARR those three functions rarely talk without someone deliberately connecting them.

Run this before your next board meeting or round close.

Update it every time you close a round.

Fifteen minutes with the right numbers on hand. Compared to the conversation that happens when a buyer’s counsel finds the gap during diligence.

QSBS is one of the few places in the tax code where a structural decision made years ahead determines the outcome. There’s no clever transaction at exit that fixes it.

Three things to carry out of this.

Know which side of July 4, 2025 your shares sit on. The regimes are different and the difference is measured in millions.

Test gross assets, not valuation. Founders disqualify themselves on the wrong number constantly.

Put it in the same review cadence as runway and headcount. The gap where QSBS value disappears is between the people running the model and the people running the legal docs. Those are usually different people who never compare notes.

For a finance lead, this is the version of the conversation worth having with your founders before the next round rather than after. The numbers are already determined by then.

Reply “QSBS” and I’ll send the eligibility snapshot as a working sheet. Gross asset calculation laid out, issuance date tracker by tranche, exclusion percentage by holding period, and the dual cap calculation for common and preferred.

Daughter has decided she’s fluent in Spanish now. She’s closer than I am.

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