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7 Tax Strategies Founders Can Use to Maximize QSBS in 2025 (Avoid the $10M Mistake) Thumbnail

7 Tax Strategies Founders Can Use to Maximize QSBS in 2025 (Avoid the $10M Mistake)

💰 7 Ways to Use QSBS to Keep More of Your Startup Gains (2025 Update)

How Founders Can Use a $10M+ Tax Break Most People Overlook

Have you ever wondered if there’s a way to sell your startup and legally avoid paying millions in federal taxes? There is—and it’s called QSBS.

QSBS (Qualified Small Business Stock) might be the single most generous tax break available to startup founders, early employees, and investors. But here’s the kicker: most people don’t find out about it until it’s too late.

In this blog, we’ll walk you through how QSBS works, what you need to qualify, and how smart founders are multiplying their tax exemption from $10M… to $100M or more. You’ll also get practical strategies and cautionary tips from Doug Greenberg, Certified Investment Management Analyst® and President of Pinnacle Wealth Advisory (PNWA).

Overview: What Is QSBS?

QSBS allows eligible shareholders in qualifying startups to exclude up to $10 million in capital gains—or 10 times their original investment, whichever is greater—from federal taxes. That’s real money. For some founders, it could mean saving tens of millions when they exit.

Who should care?

  • Startup founders and co-founders
  • Early employees who own stock
  • Angel and early-stage investors
  • Wealth advisors and family office planners

But as Doug Greenberg often says, “The best tax breaks don’t help you if you find out about them after the fact.” That’s why the time to plan for QSBS is now, not five years from now.

🏗️ How QSBS Works (The Basics)

At its core, QSBS is simple. If your startup is structured correctly and you hold your shares for five years, you may qualify for a massive federal tax break when you sell.

What you need:

  • C-Corporation: Your company must be a U.S. C-Corp.
  • Small asset size: Gross assets must be under $50 million when shares are issued.
  • Qualified business type: Certain service-based industries don’t qualify.
  • Five-year holding period: You must own the stock for 5 years before selling.

If all boxes are checked, you can claim the QSBS exclusion when you file taxes.

And here’s the wild part: 40+ states also recognize QSBS, meaning you could pay zero in state taxes too—unless you’re in states like California, New Jersey, or Pennsylvania.

🔍 1. QSBS Requirements: Don’t Blow It

QSBS isn’t something you apply for—it’s something you can lose if you’re not careful. At PNWA, we’ve seen how easy it is to make simple mistakes that disqualify your shares.

Here’s what to avoid:

  • Repurchasing stock from employees or co-founders without legal counsel.
  • Investing company cash in non-qualified assets (like real estate or mutual funds).
  • Raising a large round that pushes your assets over $50 million.

As Doug says: “Accidentally losing QSBS eligibility is one of the most expensive mistakes a founder can make—and it impacts every shareholder, not just you.”

💡 2. QSBS Rollovers: What If You Sell Early?

What if your company is acquired before you’ve held your shares for 5 years?

Enter: Section 1045 rollover.

This IRS provision lets you reinvest your proceeds into another qualifying C-Corp within 60 days. Your QSBS clock doesn’t reset—it continues ticking.

While it’s tricky to line up in real life, many serial entrepreneurs use this rule to roll proceeds from one startup into another, funding their next venture with pre-tax dollars.

📈 3. Stacking QSBS: Multiply Your Exemption

Here’s where QSBS gets exciting.

The $10M exemption applies per person, per company. That means you can gift shares or create trusts to multiply that benefit many times over.

Gifting Shares

You can gift up to $19,000 per year (as of 2025) to friends or family, and each recipient gets their own $10M exemption. The 5-year clock continues—no reset.

Think of it like this: If you gift shares to 4 family members, your family’s total exemption grows to $50M.

Using Trusts

Certain types of trusts (like SLANTs or Dynasty Trusts) also qualify as separate taxpayers and get their own QSBS cap.

Many founders at exits use a mix of family gifting + irrevocable trusts to increase their total tax-free gains to $50M, $100M—even $500M in rare cases.

🔄 4. QSBS Conversions: What If You Started as an LLC?

You’re not out of luck.

You can convert your business to a C-Corp and start the 5-year clock from that date. Just remember:

  • Your assets must still be under $50M at conversion.
  • It’s easier to convert from an LLC than an S-Corp.
  • Some founders strategically time this conversion before a priced funding round.

This is what’s known as QSBS Packing—setting a high stock “basis” to 10x your tax exemption.

Done right, it can legally unlock hundreds of millions in QSBS benefits.

👩‍💼 How Founders, Investors, and Employees Can Maximize QSBS

Founders

  • Buy your shares at incorporation.
  • File your 83(b) election.
  • Avoid repurchasing others’ shares unless cleared by counsel.
  • Gift or transfer shares before your company’s valuation explodes.

Investors

  • Get stock directly (vs. SAFEs or notes).
  • Understand 5-year holding rules.
  • Use rollovers if needed.
  • Know that QSBS typically flows down to LPs in a fund.

Employees

  • Ask if the company is QSBS-eligible before joining.
  • Consider exercising options early (if affordable).
  • Track how long you’ve held your shares directly.

Doug Greenberg’s team at PNWA has worked with founders and their families on multi-generational tax strategies using QSBS. “This isn’t just about exits,” Doug notes, “it’s about setting up long-term family wealth.”

🧠 Final Thoughts: Why This Matters

Most startup founders pour their heart into building a great company—but few take the time to structure their equity to maximize tax benefits.

QSBS is an opportunity to keep more of what you’ve built, while also helping your investors and employees do the same.

Whether you’re just incorporating, raising your Series A, or preparing for a liquidity event, the right strategy can unlock life-changing value.

Want help structuring your plan around QSBS? Reach out to our team at Pinnacle Wealth Advisory. We’ll walk you through it—step by step.

✨ We’d love to hear from you: Have you taken advantage of QSBS? Drop a comment or reach out with your experience or questions.