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.
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 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.
The issuing company must be a domestic C-Corp from day one.
Company assets must be below the limit when stock is issued.
At least 80% of assets must be used in a qualified business (most tech qualifies).
You must have received the stock directly from the company.
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?
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.
The time you've held your original startup stock.
Hold your new replacement QSBS investment.
Your combined holding period now qualifies for the 100% QSBS exclusion.
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.
This is not a DIY project. Use this checklist to guide conversations with your expert legal and tax advisors.