Over the past few weeks, there have been many QSBS questions. They all deal with the intricacies of QSBS. Some examples are:
“What happens to QSBS status if I exercise ISOs early?”
“How does the less than $50 million / $75 million asset threshold work?”
“What if I am a founder and have a Series A round financing and there is a share buyback of founder shares, do I get to keep my QSBS status?”
QSBS Questions Answered
There are many rules to set up and maintain QSBS as you work on building your business. Let’s go through the answers to the questions above in greater detail.
ISO Early Exercise Inquiry
When you exercise ISOs early, the holding period begins on the vesting date, not the exercise date.
For example, your vesting date is January 2026 and you exercise ISOs early in September 2025. Your holding period for the shares will start in January 2026, not September 2025. So there is no advantage from a holding period perspective for QSBS when exercising early.
Remember that an option or warrant is never considered QSBS, even if the underlying stock meets the definition of QSBS. Ownership of the stock, in this case option exercise, is required for QSBS qualification.
Asset Threshold Exploration
The next QSBS question deals with the asset threshold. When you acquire your company shares, the amount of assets of the company must be below a certain level. Typically, the limit is $50 million. However, for stock acquired after July 4, 2025, the maximum amount of assets is $75 million.
The calculation for the threshold of assets is complicated and confusing. It is the adjusted cost basis of the assets. On the other hand, intangible assets like copyrights and patents do not count towards this total.
One other item to keep in mind is a company’s continued fundraising and asset growth. For instance, you work for a small company for a very long time that continues to be successful. In 2014, the value of the assets was $15 million. Growth continued and in 2017 the value of the assets was $30 million. The company and its shareholders would qualify for QSBS at both points in time.
However, in 2021, assets increased to $65 million. There will be no QSBS for any shares issued in 2021 or additional shares in the future. Sadly, continued asset growth beyond the threshold can disqualify a company from QSBS.
Share Buyback Question
Our last QSBS question concerns buybacks. What if you are a founder and have a Series A round financing and there is a share buyback of founder shares?
Buying back founder shares during a fundraise could jeopardize QSBS. The timetable of five years of share ownership (pre July 4, 2025 share ownership) can be disqualified because you sold some shares back to the company.
This is a very complex transaction and you would have to weigh the benefits of getting some liquidity versus the disadvantages of losing QSBS status.
What to Do
QSBS has many specific rules and intricacies. It’s best to work with a professional when setting it up, maintaining it, and answering any QSBS questions.