Founder’s Guide to QSBS: 8 FAQs We Hear From Startup CEOs

You’ve poured years into building your company. Now the exit conversations are finally happening, and the numbers look life-changing. 

Then someone at the table mentions “QSBS.” 

Suddenly, you’re wondering: did a decision you made years ago just cost you millions in taxes? 

Most founders don’t think about QSBS until it’s too late—yet it can be the difference between keeping or losing a fortune when you sell. 

That’s why we wrote this article: to answer the most common questions we hear from founders and provide a practical introduction to QSBS: what it is, why it matters, and the traps that can cost you the benefit if you don’t plan ahead.

What Is QSBS and Why Should I Care?

QSBS isn’t a loophole—it’s a deliberate piece of the tax code meant to reward entrepreneurs who take the risk of building something new. The rules are strict, but the payoff is massive: up to $15 million in tax-free gains per founder at exit. Under the new law, tiered holding periods of three, four, and five years provide partial exclusions even before the full five-year mark, giving founders greater flexibility around timing an exit.

Most tech businesses are eligible in theory, but in practice, many founders lose out because they didn’t make the right structural decisions early on.

Here’s an example: if your company sells for $30 million and you own 40%, QSBS saves you $2.86 million in federal taxes. Without it, you pay that full amount at today's 23.8% rate.

Most tech companies naturally qualify since they're in active technology businesses. The challenge is structuring everything correctly from day one. 

How Do I Set Up My Company to Benefit from QSBS?

If you want to qualify for QSBS, the most important step is starting as a C corporation. QSBS only applies to stock issued by a U.S. C corp—not an LLC, partnership, or S corp. Founders who incorporate correctly from day one ensure their shares start accruing QSBS holding time immediately.

Once your entity is formed, issue founder stock early and keep meticulous records of all stock issuances and valuations. Make sure your corporate documents, including articles of incorporation, board approvals, and cap table, are complete and well maintained. These records will be essential if you ever need to prove QSBS eligibility during an exit or IRS review.

Finally, stay disciplined about your balance sheet. Keeping excess fundraising proceeds idle for too long or allowing the company’s total assets to exceed the $75 million threshold can disqualify future stock. From day one, operate as an active business, deploying capital into hiring, development, and growth, to maintain eligibility.

What Are Section 83(b) Elections, and What Are the Risks and Benefits?

When founders or employees receive restricted stock, ownership typically vests over time. Without an 83(b) election, your QSBS holding period—and the clock toward tax-free treatment—doesn’t begin until the stock vests. By filing an 83(b) election within 30 days of receiving the grant, you can choose to be taxed on the stock’s value immediately, starting the QSBS clock right away.

The benefit is clear: early-stage shares are usually worth very little, so the immediate tax bill is minimal, and the long-term gain may ultimately be tax-free under QSBS. The risk is that if the company fails or the shares never vest, you’ve already paid tax on something that never materialized.

In most early-stage startups, filing an 83(b) election is a smart move—but it requires discipline. Missing the 30-day deadline is irreversible and can cost founders years of QSBS eligibility.

Did Starting as an LLC Kill My Benefits?

Yes, almost certainly. However, if you convert now, you can benefit from the updated $15 million exclusion, provided you don’t intend to exit within the next three years. 

QSBS only applies to C corporation stock. Converting from LLC to C corp typically resets your five-year holding period because the IRS treats it as selling your LLC interest for new C corp stock. If you have an LLC and you want to benefit from this when you exit your company, consider a conversion to a C corporation now to reset that five-year holding period. 

Example: Form LLC in 2020, convert to C corp in 2023, sell in 2025. You've only held C corp stock for two years—one year short of qualification for the new 50% deduction. That could have a huge financial impact: a founder with a $12 million gain pays zero taxes with proper C corp structure, or $2.86 million without QSBS qualification. If you sold in 2026, 50% of the gain would be excluded, in 2027 75%, and in 2028, the full $12 million would be eligible for exclusion. 

What Are the Ongoing Requirements?

Being a C corp isn’t enough. To keep your QSBS eligibility, you also need to meet several ongoing requirements:

• $75 Million Asset Limit: Your company can’t have more than $75 million in gross assets at the time new stock is issued. This comes into play most often during fundraising. For example, if you’re sitting at $55 million and close a $30 million round, you’ve crossed the threshold—meaning any stock issued after that point (including employee options or founder secondary shares) won’t qualify for QSBS.
  
  
• 80% Active Business Requirement: At least 80% of your assets must be used in the active conduct of your business, not sitting idle as cash or investments. Raising a large round and parking the funds in a bank account for too long can cause problems. The IRS wants to see money being deployed into operations—hiring, product development, R&D, equipment—not just held on the sidelines.
  
  
• Holding Period Requirement: To claim QSBS benefits, you must hold your stock for at least three years to qualify for a 50% exclusion, four years for a 75% exclusion, and five years for the full 100% exclusion. For founders who receive restricted stock, the clock typically starts when the shares vest—unless you file an 83(b) election within 30 days of the grant, which allows the holding period to start immediately. Missing that election means waiting until vesting to begin your QSBS timeline, which can delay eligibility for the higher exclusion levels.
  
  
• Qualifying Business Activities: QSBS is only available for certain types of businesses. While most technology companies qualify, some service businesses are excluded—like law, finance, accounting, consulting, hospitality, or healthcare. It’s important to confirm that your company’s primary activity falls on the right side of the eligibility line.

How Do VC Rounds and Team Equity Work?

Raising venture capital doesn’t end QSBS eligibility, but crossing $75 million in assets changes the game. Any stock issued after that point—like employee options—won’t qualify. That’s why the timing of grants around a funding round matters.

QSBS also applies per person, not per company. Three qualifying co-founders could exclude up to $45 million combined, and early employees may qualify if their options were granted before the $75 million threshold was crossed.

I Think I Qualify. How Do I Stay Qualified?

Staying qualified for QSBS requires ongoing attention. Keep thorough records—your incorporation documents, stock issuance approvals, and financial statements proving you stayed under the asset limits may be reviewed years later during diligence or an audit.

Be intentional with cash management. Fundraising proceeds should be deployed into hiring, product development, or equipment rather than sitting idle in bank accounts, which can cause problems with the active business test.

Finally, think carefully about the timing of equity grants. If you’re approaching the $75 million asset threshold, consider accelerating employee grants or aligning them carefully with funding rounds to preserve eligibility.

I've Lost Qualification. Any Options?

Even if you’ve lost QSBS eligibility, there are still ways to soften the impact. If you’ve held QSBS for at least six months, Section 1045 allows you to defer gains by reinvesting the proceeds into new qualifying stock within 60 days—a valuable tool for serial entrepreneurs who want to roll gains from one venture into the next.

There are also more advanced strategies, such as trust planning and multi-holder approaches, that can multiply the benefit across family members or entities. These require experienced advisors but can make a meaningful difference in long-term tax planning.

Don't Leave Millions on the Table

QSBS isn’t something you can tack on at the end—it has to be built into your company from the very beginning. The choices you make at incorporation, during fundraising, and when issuing equity will determine whether you qualify years down the line.

The difference, as we’ve shown through some of the examples in this guide, can be significant: the difference between multi-million tax bills and a tax-free exit. 

At Iota Finance, we help tech founders make QSBS a core part of their financial strategy, from incorporation through exit. We understand both the technical rules of Section 1202 and the realities of scaling a high-growth company.

Don’t wait until you’re in exit talks to find out where you stand. By then, it’s too late to fix mistakes made years earlier.

Schedule a QSBS planning session today and make sure you’re not leaving millions on the table.

Disclaimer: This article is for informational purposes only and does not constitute tax, legal, or accounting advice. QSBS rules are complex and fact-specific. Consult with qualified advisors before making any decisions based on this content.