Gimme Shelter: VC-Backed M&A Tax Strategies for QSBS/1202

“Hey, did we make the filing necessary to have 1202 'QSBS' stock? Now that we have an offer to sell the company, our investors are asking whether QSBS allows them to shelter their gain from taxes.”

“Hold, hold on, hold onto me...” XAmbassadors sang “Unsteady” (which is not about the 5 year holding period for stock under QSBS, but it could be...) and other songs at AngelVineVC, a VentureCrush event in NYC a few years ago. [Disclosure: Ed Zimmerman and his firm co-founded and run AngelVineVC and VentureCrush.] [In the photo, Ed is the one wearing a name tag].

That's a question we field regularly, especially these days when venture-backed M&A has really heated up. The answer, invariably, is no - no filing was made, but not for the reason the person who posed the question may think. Internal Revenue Code section 1202, under which stock of startups can be treated as “Qualified Small Business Stock” (QSBS), has become a high stakes issue for many startups because of the potentially millions of dollars per holder it can shield from taxes. That said, section 1202's complexities make it very difficult to consistently plan ahead. For starters, in the words of the Alabama Shakes, “You got to hold on” for more than Five Years...the rest is more complicated.