Your Exit Strategy Could Save You Millions
The difference between a strategic exit and an unplanned one is staggering. Use this interactive tool to see how different choices impact your after-tax proceeds from a startup sale. Adjust the sale price to see how much is at stake.
This chart illustrates potential outcomes. The "Optimal Path" assumes a C-Corp stock sale with a Section 1045 rollover to achieve a full QSBS tax exclusion. The other scenarios show the significant tax costs of alternative structures. All calculations are illustrative, based on top marginal rates.
Your Optimal Path to Zero Tax
The key to a tax-free exit is Qualified Small Business Stock (QSBS) under IRC Section 1202. However, eligibility is strict. This interactive guide will help you determine if you're on the right track and what to do if you're not.
Step 1: The QSBS Gauntlet - Are You Eligible?
Answer these questions to see if your stock might qualify for the powerful QSBS exclusion. This is the foundation of the entire strategy.
This is a mandatory, non-negotiable requirement.
Stock from S-Corps or LLCs cannot qualify.
Critical for starting the holding period clock.
Without it, the QSBS strategy is nearly impossible.
A key test for "small business" status.
This will be $75M for stock acquired after July 4, 2025.
Step 2: The Holding Period Problem
For a 100% tax exclusion, you must hold your QSBS for **more than five years**. Your startup is two years old, meaning you currently fall short of this requirement. A sale today would be fully taxable.
This is the central challenge you must solve to save millions in tax.
The Solution: The Section 1045 Rollover
Fortunately, there's a powerful solution. IRC Section 1045 allows you to sell your current QSBS, defer the entire gain, and "roll it over" into a new QSBS-eligible company. This strategy preserves your tax-free potential.
Your Current 2-Year Hold
The holding period you've already earned.
The 1045 Rollover
Reinvest your sale proceeds into a new QSBS-eligible startup within **60 days** of your sale.
New 3+ Year Hold
Hold the new investment for at least 3 more years.
5+ Year Total Holding Period
You now meet the requirement for a 100% tax-free exit on the future sale of the new stock!
Warning: The 60-day window to find, vet, and close a new investment is extremely tight. You must start planning for the rollover months before your company is sold.
The Critical Negotiation: Deal Structure
The structure of your sale is as important as the price. A stock sale is essential for QSBS benefits. An asset sale, often preferred by buyers, creates a "double taxation" nightmare for a C-Corp founder. Use this simulator to see why.
Stock Sale: The Founder's Choice
In a stock sale, you sell your personal shares. The gain is taxed once at favorable capital gains rates. Most importantly, this is the only structure that allows for the QSBS tax exclusion.
Your Final Pre-Sale Action Plan
This is not a DIY project. Work with experienced tax and legal advisors. Use this checklist to guide your conversations and ensure you cover all critical bases before the sale.
Entity & Stock Diligence
- ✓Confirm C-Corp status since inception.
- ✓Locate and verify your timely filed Section 83(b) election.
- ✓Document compliance with the <$50M gross assets test.
- ✓Confirm you operate in a "qualified trade or business".
M&A Negotiation Prep
- ✓Insist on a stock sale structure with your M&A advisor and buyers.
- ✓Model the tax cost of an asset vs. stock sale as a negotiating tool.
- ✓Review contracts for anti-assignment clauses to strengthen your case for a stock sale.
Section 1045 Rollover Plan
- ✓Start sourcing potential replacement QSBS investments 3-6 months pre-sale.
- ✓Conduct due diligence on target companies' QSBS eligibility.
- ✓Get QSBS representations from the company you invest in.
Assemble Your Expert Team
- ✓Hire legal and tax advisors with specific expertise in Section 1202, 1045, and tech M&A.
- ✓If considering philanthropy, engage a Donor-Advised Fund sponsor early.