What Is QSB Stock and Why Does It Matter for Startups?
capitalandgrowth.org
capitalandgrowth.org
It’s a major benefit if you have the opportunity to early exercise your shares.
The other way these got used was for existing business -- it's 10x the basis OR $10mm, whichever was larger, so there were deals where people would try to structure a $500mm deal using $50mm of buy-in as QSBS. I'm not sure about the details, but I remember seeing tax attorneys working on them.
http://info.capitalandgrowth.org/money-for-kids/
Btw, again, grellas has over 30k karma on HN!
I noticed that it uses the old 28% capital gains rate, which is higher than what it is now (15-20%). Does that mean if your startup "goes unicorn" you get a tax break on the first $10M but you end up paying an extra 8% or more on the rest? And therefore this is only a good structure for startups aiming for smaller exits (hence the "small business" stock)?
Say what? That has nothing to do with it. Any difference in price is do to when the last 409a was done.
ISO's are options on shares of common stock, which have a completely indeterminate value in most start-ups, because they likely don't exist outside of the company's ISO pool and the founder's stakes, and they never trade.
Investors are all buying preferred shares, which carry a liquidation preference, sometimes a multiple of their share price. Any exit below the sum of the outstanding preferences mean that any common stock is worth $0.
Companies take advantage of this to file 409a's saying that common stock is worth a fraction of the latest share transaction for preferred stock. I've seen ISO's with a strike price of 30% of the last preferred shares at Series B. Certainly, they are worth less than the preferred shares, but are they worth 70% less? Who can say? But - it's in the best interest of employees to keep that value as low as possible.
On the day of an IPO, all preferred shares convert to common stock, at which point the value has to be 1:1. In order for the company's prior 409a's to pass an audit and not get the ISO plan disqualified, the values have to converge smoothly leading up to the IPO.
I was being obtuse by pointing out that if you judge the gap between the value of common shares and preferred shares to be smaller than what the 409a dictates, then you are "in the money" on grant day. Also, a lot of start-up employees don't understand nearly as much as I've written above about ISO's (I know, because I was one once), and so it just looks to them as if they were handed free money.
A $10mm Series A valuation is likely going to be something like $10k for 1% of the common. $10k is a lot of money, but if I believed in a company enough to take a Series A 1% role I'd probably do $10k. It's better to get in right before a valuation change, of course -- it might have been 6mo since a 409a valued the company at $3mm.