In this guide, we’ll break it down in plain English:

✅ What QSBS is

✅ Who qualifies (it’s not just for founders)

✅ The steps to protect it

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Let’s start at the top:

What Is QSBS?

QSBS is a federal tax rule that lets you avoid paying taxes when you sell stock in a qualifying startup.

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Here’s how it works:

If your shares meet a few specific rules, you can exclude up to $10 million (or more) of capital gains from federal taxes. That could mean saving hundreds of thousands of dollars — or more — depending on your exit.

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It’s designed to reward people who take risks on early-stage startups. But it only applies if a few important boxes are checked.

Important: It Starts With the Company

The most common mistake we see is people checking whether they qualify first.

But it doesn’t matter how long you’ve held your shares, or what type of equity you have — if the company doesn’t qualify, the tax break doesn’t apply.

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Think of it like this:

✅ Company must qualify

➡️ Then you can check if you qualify

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So, let’s start there.

Does the Company Qualify?

To be eligible for QSBS, the company that gave you stock must meet certain criteria at the time your shares were issued. These include, but are not limited to:

• Being a U.S. C-corporation
• Having $50 million or less in total assets when the shares were issued
• Operating in a qualified industry — typically one that’s building or selling a product (not services like law, accounting, finance, or restaurants)

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📌 Important:

There are additional technical requirements that aren't listed here, and eligibility may evolve as the company grows or changes.

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Also: This isn’t something you should figure out yourself. It’s the company’s responsibility to determine if it qualifies — and to track that over time. If you think your shares might qualify, you can (and should) ask the company for written confirmation.

If the Company Qualifies, Do You?

Once you’ve confirmed the company qualifies, you’ll need to meet a few personal criteria to take advantage of the QSBS tax break.

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You may qualify if:

✅ You acquired the shares directly from the company, while it was still QSBS-eligible
✅ You held the shares for at least 5 years
✅ You’re an individual, trust, or pass-through entity (not a corporation)

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Let’s break down what “acquired” means depending on the type of equity:

• Stock options (ISOs or NSOs):
  The 5-year QSBS clock starts after you exercise your options and receive stock — not when the options were granted.
• Early exercised options + 83(b) election:
  If you early exercise your options and file an 83(b) election, the 5-year clock starts from the exercise date. Without the 83(b), the clock starts only when the shares vest.
• RSAs (restricted stock awards):
  Similar to early exercised options, the QSBS clock starts at the grant date if you file an 83(b) election. Otherwise, the clock starts when the shares vest.

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📌 Why this matters:

If you miss the 83(b) election deadline (30 days), you could delay your QSBS timeline by months or even years — and risk missing the 5-year holding period entirely if you sell too early.

It’s Not Just for Founders

A lot of people assume this only applies to founders. That’s not true.

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QSBS can apply to:

• Employees with stock options or stock grants
• Investors who buy shares early
• Advisors or consultants paid in equity
• Founders, of course

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If the company meets the criteria and you meet yours, you don’t have to be a founder to benefit.

How Much Can You Exclude?

You can exclude the greater of:

• $10 million in capital gains, or
• 10x what you paid for the stock

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💡 Example:

You exercise options and pay $100,000. Five years later, you sell for $1.5 million.

→ You can exclude up to $1 million in gains (10x $100K).

→ If you invested $1M and sold for $12M, you may exclude up to $10M.

Warning: Not All States Follow the QSBS Rule

QSBS is a federal tax benefit. But your state might not follow it.

Here’s how a few states treat QSBS:

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Before you sell, check with a tax advisor to see how your state handles QSBS.

How to Protect QSBS Status

QSBS eligibility only applies to stock acquired while the company qualified. So what happens if the company later grows or pivots?

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Here’s the good news:

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✅ Once you acquire eligible shares, that status is locked in.

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Even if the company later grows past $50 million in assets or changes its business model, your previously issued QSBS stock is still eligible — as long as it met the requirements at the time you got it.

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But here’s what can go wrong:

• If you wait to exercise options and the company is no longer QSBS-eligible when you do, those shares won’t qualify.
• If you receive new equity grants after the company crosses the $50M threshold, those new shares likely won’t qualify.
• If you don’t file an 83(b) election, the QSBS clock might not start when you expect — which can disqualify you if you sell too soon.

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✅ What to do:

• Track your exercise dates and grant types
• File your 83(b) elections on time
• Request an annual QSBS status letter from your company
• Talk to a tax advisor before a sale or tender offer — the rules get tricky quickly

Final Thoughts

QSBS is one of the most generous tax benefits available to startup employees, founders, and early investors — but it’s often misunderstood or overlooked.

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If you think your shares might qualify and you’re planning a future sale or tender offer, it’s worth getting clear on where you stand.

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At Fifteenth, we help startup professionals make smarter tax decisions around equity — including how to take advantage of QSBS before it’s too late.

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👉 Have questions? Reach out — we’re here to help.

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