No More Hustleporn: The most important tax rule that affects startup founders, investors, employees & business owners is QSBS

Tweet by Ankur Nagpal

      The most important tax rule that affects startup founders, investors, employees & business owners is QSBS
  So many people I know missed out on massive tax savings since they didn't know about this!
  Here's everything you need to know about how to structure your company for it:
      QSBS stands for Qualified Small Business Stock
  Here's how it works:
  If you are a startup founder or startup employee that owns their shares for 5+ years
  & the company follows some rules
  You pay zero federal (& potentially state) taxes on $10M when the company sells
      The rules are obviously pretty important!
  1 - This applies to C-corporations only
  2 - You have to buy your shares from the company directly
  3 - Has to be actual shares, not options etc.
  Also if 10x what you paid for your shares is more than $10M, then you get a break on that!
      You also have to be careful to not accidentally make your company ineligible for QSBS by:
  1 - Being too late, company can't have >$50M of asset
  2 - Having transactions where the company buys back shares
  3 - Being in an unqualified category (google this, most startups are fine)
      No federal taxes on $10M, dope
  What about state tax?
  Most states also give you this tax break excluding:
  New Jersey
  Puerto Rico
  And these states give you a partial break:
  (Don't move states because of QSBS!)
      This is all fairly straightforward so far
  But I'm soon going to share how to take it to the next level
  (and how we're setting it up on our end)
  But for now, talk to your attorney or ask your company if they are set up to offer QSBS
  And negotiate for it!
      OK, now for the advanced strategies and where it gets interesting
  QSBS applies on a per shareholder basis
  That means each shareholder has their own $10M limit
  So every employee, investor etc. has their own limit
  And you can have multiple entities work as a QSBS "multiplier"
      Strategy 1 - Give shares to family members
  Early on, you can be generous & get your parents or siblings on your cap table
  They can buy shares early and when it's time to sell, each person has their own $10M QSBS bucket
  As a household, this can be a huge multiplier!
      Strategy 2 - Set up a non-grantor trust
  A non-grantor trust functions as a separate tax payer
  You set it up for the benefit of your children, family etc.
  You transfer your shares into the trust, and as a unique taxpayer it has its own $10M limit
  Also bypasses inheritance tax
      Strategy 3 - Let your team buy shares as soon as possible
  You want to make your employees rich too, don't you?
  Let them buy and own their shares fully as soon as possible so they can start their own 5 year clock
  Traditional optional plans frequently exclude employees from QSBS
      Strategy 4 - Charitable Remainder Trust
  This is a QSBS multiplier that I used when I sold my last company
  - You multiply QSBS
  - You get a charitable write-off for a portion of the donation
  - You get paid a % annually
  - Your favorite charity / foundation receives the balance
      Strategy 5 - QSBS Rollover
  This is hard to pull off but sometimes you have no choice
  If you sell your shares before 5 years, you have a 60 day window to invest in another QSBS asset
  The clock then continues ticking & if the combined holding period is 5 years, you pay no taxes
      Here's an example:
  - You sell your company 2 years after buying your founder shares
  - Within 60 days, you invest in a friend's startup that is also qualified for QSBS
  - She sells 3 years later, and since it's been 5 years combined you pay no taxes with QSBS!
  Tough but doable
      Advanced Strategy - No Taxes on Upto $500M on Gains
  - Set up your company as an LLC
  - When total asset value approaches $50M, convert it to a C-Corp
  - Founders are contributing ~$50M of shares so QSBS applies to 10x the contributed basis
  Seems excessive but eh, it exists 😅
      How am I applying all this personally?
  - Ensuring our startup is QSBS eligible
  - Letting our team buy shares asap
  - Giving equity to family members
  - Setting up a non-grantor trust
  - Setting up a charitable trust
  (& somewhere along the way building a decent business...)
      Lots of stuff covered here!
  - Most of this is pretty complicated and IANAL, talk to an attorney to double check QSBS status
  - A service I strongly recommend to set any / all of these trusts up is
      's company Valur
  - Don't over optimize this