There was a fun game when the window on this was first closing -- open a bunch of corporations, let them age a bit ("while actively doing business" of some kind -- just not too much), and then use them for projects later. Part of the 5y clock would already be run down, but at the time, it seemed very likely QSBS with this kind of favorable treatment wouldn't be offered again.
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.
Is there any reason not to do this for a startup that qualifies? Specifically are there any drawbacks if the gain exceeds the $10M maximum?
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)?
It does, generally. (Not legal advice, talk to a lawyer, but it's basically the default when a natural person buys founder shares for a pittance, and a good reason to offer restricted stock rather than options (or at least, to offer early exercise) up to seed and Series A and possibly a little longer.)
What companies are selling Series A shares at "a pittance"? Presuming the money means something to you, would you rather pay $100,000 cash for 1% of a $10MM Series A-ready startup or pay $0 for ISOs?
UK tapered capital gains relief for entrepreneurs, up to £10m. UK also has SEIS and EIS, but that's not quite the same. Unsure about other countries, but you usually have some kind of tax incentive to invest in small and new companies.
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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)?