The Founder’s Guide to QSBS: Understanding the 2025 Updates and Avoiding Costly Mistakes

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Eight years ago or so, I was catching up over drinks with a founder friend. We had been friends for a handful of years at that point. A mutual investor had introduced us, and since our offices were nearby in LA, we would often meet up for a drink after a long day of startup life. Those conversations were medicine for me in some of the more challenging weeks.

During one such evening, my friend showed up with news he was trying to process:

The board wants us to sell. We have an offer for a majority stake of the business, and I’m trying to figure out if there’s any chance we should take it.

As we began unpacking the financial implications of the deal for my friend, his co-founders, and his team, I was surprised he didn’t know what I meant when I asked whether his shares were QSBS eligible.

As a coach, I meet founders all the time who are unfamiliar with this very founder-friendly part of the US tax code. So I thought I’d share a bit about it today.

For all the challenging parts of building a startup, it can be easy to forget there are some real benefits tucked inside the journey. QSBS is one of them. Many first-time founders do not understand it until it is too late.

QSBS stands for Qualified Small Business Stock.

It’s one of the biggest, least talked-about advantages available to founders and early employees. And with the 2025 law that took effect this summer, the rules became even more favorable.

Here is the simple version.

If you start or join a US C Corporation early, and you acquire your shares directly from the company, you may be able to exclude a very large amount of gain from federal taxes when you eventually sell. Many founders fail to plan for this. Many more accidentally break their eligibility without realizing what they’ve lost.

The update that passed in July created three new holding periods. Instead of waiting five years for any benefit, founders now receive a partial exclusion earlier.

Hold for three years and you can exclude 50 percent of your gain.

Hold for four years and you can exclude 75 percent.

Hold for five years or more and you can exclude the full 100 percent.

The old limit of the greater of fifteen million dollars or ten times your basis is still there. And starting in 2027, that floor adjusts for inflation. For meaningful exits, this is real money for founders, early employees, and early investors.

The definition of a qualifying company also expanded. Historically, the business had to have under fifty million dollars in gross assets at the time you received your shares. That threshold is now seventy-five million. More growth-stage companies, not just seed-stage startups, now qualify.

Here is what has not changed.

You still need to acquire your shares directly from the company. That means primary issuance, whether through investment, option exercise, or services. SAFEs and convertible notes only count once they convert into stock. Transfers from another person generally do not qualify. Your three-, four-, or five-year clock starts when the stock is issued to you.

The company must be a US C Corporation and must be operating a qualified trade or business. Most tech companies qualify. Some categories like finance, law, consulting, hospitality, and healthcare do not.

And for stock granted before July 4, 2025, the old rules still apply. Five years required. Ten-million-dollar floor. No partial exclusion.

There are creative strategies that experienced founders and investors use. Couples can sometimes stack their exemptions. Trusts can be set up, each with their own limit. Mergers and reorganizations can preserve QSBS status when handled with care. The details matter. Get thoughtful advice early.

A quick note on navigating QSBS questions.

It helps to build the right team around you.

A great corporate attorney who understands venture-backed companies.

A great personal tax attorney who can eventually paper the legal opinion if you exit.

And a CPA who works with startups and knows how QSBS interacts with option exercises, AMT considerations, and the timing of your issuances.

You do not need to know everything yourself. You just need guides who can see around corners.

I’ve helped many founders navigate the stickier QSBS questions that show up along the way, especially when there are tensions between what is good for a founder tax-wise and what is good for others on the cap table. These are delicate moments. They often touch identity, fairness, power, alignment, and long-term trust. Handling these conversations well matters.

Why share all of this?

Because if you’re going to sacrifice years of your life to build something new, you should understand the full picture. The risk. The reward. The parts that will take years off your life. And the rare places where the law creates a little oxygen for founders who win.

Most first-time founders have never heard of QSBS. They do not exercise their options early. They accidentally break eligibility. They wait too long to incorporate as a C Corporation. They let their company cross the asset threshold before issuing all of their founder stock. They enter acquisitions without understanding how the structure will affect their long-term tax treatment.

You don’t need to become a tax expert. You simply need to know this system exists. The decisions you make today could create millions, even tens of millions, in tax-free benefit down the road.

And that feels worth understanding.

QSBS will not make the hard parts of this journey easier. But it is one small gift available to you for taking the risk. For betting on yourself. For doing the nearly impossible work of bringing something new into the world.

If you want support in navigating the emotional and strategic side of this work, reach out. I work with founders every day who are building ambitious companies and trying to stay sane while doing it.

Sending love from LA.

-Matt

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