A Founder's Guide to a Tax-Free Exit

Navigating the sale of your startup is complex. The difference between a planned exit and an unplanned one can be millions of dollars. This guide visualizes the optimal path to maximizing your net proceeds.

The $3.5 Million Question

For a hypothetical $7.5M sale of a Washington-based startup, the right strategy can mean the difference between keeping the full amount and losing over 47% to taxes. The data below compares potential outcomes.

The Path to Zero Tax: Qualified Small Business Stock (QSBS)

The entire strategy hinges on IRC Section 1202, a powerful provision that can eliminate 100% of federal and Washington state capital gains tax. But eligibility is a gauntlet.

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C-Corporation

The issuing company must be a domestic C-Corp from day one.

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<$75M Gross Assets

Company assets must be below the limit when stock is issued.

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Active Business

At least 80% of assets must be used in a qualified business (most tech qualifies).

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Original Issuance

You must have received the stock directly from the company.

The 5-Year Hurdle

To get the 100% tax exclusion, you must hold your QSBS for more than five years. Your startup is only two years old. So what's the solution?

The Section 1045 Rollover

This powerful strategy lets you sell your current QSBS, reinvest the proceeds into new QSBS within 60 days, and "tack" your holding periods together to reach the 5-year mark.

2 yrs

Your Current Holding Period

The time you've held your original startup stock.

3+ yrs

New Holding Period

Hold your new replacement QSBS investment.

5+ yrs

Tax-Free Exit Unlocked!

Your combined holding period now qualifies for the 100% QSBS exclusion.

Deal Structure is Destiny

The legal structure of the sale is a critical negotiation. A stock sale is essential for QSBS. An asset sale triggers a "double taxation" trap that decimates your proceeds.

Your Pre-Sale Action Plan

This is not a DIY project. Use this checklist to guide conversations with your expert legal and tax advisors.

✓Confirm C-Corp status and timely 83(b) filing.

✓Insist on a stock sale structure in all negotiations.

✓Proactively plan your Section 1045 rollover months in advance.

✓Assemble a team with specific QSBS and M&A expertise.