QSBS Eligibility Tracking and Maximizing Returns

Optimize for QSBS treatment and understand eligibility on VC investments

Startup investing returns aim to be exponential. Maximizing these returns is critical, and understanding the tax considerations of a liquidity event is helpful. While many liquidity events are taxed at the long-term capital gains rate, there is an even better tax treatment, known as Qualified Small Business Stock - or simply QSBS.

What is QSBS and what does it mean? In simple terms it means an incredible opportunity to reduce (all the way to $0.00) the tax liability on your first $10M in returns.

To understand this further here’s the take from Stripe:

Holding qualified small business stock (QSBS) can radically change the capital gains tax liability for startup founders and early investors. They can receive as much as a 100% exemption on federal capital gains taxes up to $10 million, or 10 times the original investment. Savvy entrepreneurs are increasingly using QSBSs to maximize financial returns.

Basically, there’s a provision in the U.S. tax code that rewards investors who invest in a small business early and then own shares over a long period of time. Even better, that reward grows as the business grows.

The question for you as a VC is;

How to manage and track QSBS eligibility across your portfolio?

The QSBS Eligibility VC Tracker from Graph Advisors can help.

This QSBS Calculator does a few things quite simply and elegantly:

1. It converts the eligibility tests into simple to understand, fact-based questions

2. It models out what the benefit might be upon an exit

3. It creates a common language for you to use with your portfolio companies.

   1. Obviously, there are more important things than QSBS eligibility to discuss with founders, but when it comes to their capitalization strategy and their own incentives as owners, this helps you be a resource to them

   2. More than just sending an article (again, the Stripe write-up is top notch), you can give them a tool that’s easy-to-use and legible

4. It gives you a foundation for tracking status across your portfolio so you can understand how it will impact you and your LPs

5. It puts you in position to show your work if and when a family office LP asks you if you’re “taking advantage of QSBS provisions for the fund” — now you know exactly what they’re talking about and you can show them you have a system in place to manage this — it’s not an afterthought

We would love to know what you think.

Important disclaimer — this is an operational tool — it is not tax advice. If you have questions regarding taxes and your portfolio, please contact your tax professional.

If you’d like to discuss customizing this QSBS calculator and integrate it with your own operational flow, please reach out to us: hello@graphadvisors.com.

Looking for more helpful resources for? See our VC Resource Library