A potentially huge tax savings available to founders and early employees is being able to exempt up to $10 million in capital gains or 10x the invested capital, whichever is greater, from federal taxes if the investment was held at least 5 years. The rules applying to Qualified Small Business Stock (QSBS) were designed to encourage investments in certain small businesses.However, the exemption no longer applies to California income taxes since 2012. Some entrepreneurs contemplate leaving California before their M&A or IPOs are completed, but be warned that this must be a bonafide intention to move and is subject to audit for at least 3 years. Other states should be reviewed on a case by case basis.

The main factores to qualify for QSBS status are:

• The stock has to be purchased directly from the company as opposed to a secondary market.
• The company needs to be a C corporation.
• The stock had to be issued after August 10, 1993.
• Company issuing the stock has had less than $50 million in capitalization continuously from inception or August 10, 1993 through the point where the investment was made.
• Certain redemptions can retroactively eliminate QSBS status.
• Many service businesses, hotels, banks, insurance companies, farms, etc. are not eligible for QSBS treatment.
• If you have not yet met the 5 year threshold, you can do a qualified rollover into another QSBS until the 5 years has been achieved.