Key Takeaways
- The QSBS exclusion depends on what you sell, not on the price. In an acqui-hire, the qualified small business stock (QSBS) exclusion usually applies only when shareholders sell or exchange their own stock.
- Four common deal structures produce four different tax results. On the same headline price, the after-tax gap between structures can run into millions of dollars.
- Your seat on the cap table changes the answer. Founders, investors, and employees each face a different question in the same deal.
- The company left behind can lose its QSBS status over time. What happens to a startup that keeps only cash and royalty payments after its team leaves?
If you founded an AI startup, a large tech company may offer to hire you and your key engineers. The offer might be a stock purchase, a merger, or an asset purchase. Or the company might pay your startup to use its technology while hiring you and your engineers. At the negotiating table, those can look like four versions of the same exit. For tax purposes, however, they are four different transactions.
That difference matters most for the QSBS exclusion, which can remove millions of dollars of gain from federal tax. Since 2024, large tech companies have reportedly spent more than $20 billion hiring AI startup founding teams. Many of those deals never formally buy the company. As a result, deal lawyers now push founders to protect the exclusion during negotiations, because it can be worth more than any other single term.
This question comes up often at the term sheet stage, while there’s still time to change the structure. The answer also depends on your place on the cap table, since founder shares, investor shares, and employee options each get their own treatment. Most founders hold at least two of them.
How Much Is the QSBS Exclusion Worth, and Which Rules Apply to Your Shares?
Section 1202 of the Internal Revenue Code lets individuals and other noncorporate shareholders exclude gain on qualifying C corporation stock. The exclusion has a per-company cap for each shareholder. Which version of the rules applies depends on when the company issued your shares, not when you sell them:
- Stock issued on or before July 4, 2025 follows the prior rules. Shareholders must hold these shares for more than five years before any exclusion applies. The cap is the greater of $10 million or 10 times your basis, or what you paid for the shares. The company’s gross assets also could not exceed $50 million when it issued the stock.
- Stock issued after July 4, 2025 follows the rules in the One Big Beautiful Bill Act (OBBBA). You can exclude 50% of the gain after three years, 75% after four, and 100% after five. The cap rises to the greater of $15 million or 10 times basis. The gross asset limit also rises to $75 million. Both dollar figures adjust for inflation starting in 2027.
Most AI startup cap tables now hold both kinds of stock. For example, a founder’s 2022 common stock follows the old rules, while 2026 bridge-round shares follow the new ones.
Two more details matter once a deal is on the table. First, the IRS taxes the non-excluded part of the gain in the 50% or 75% tiers at 28%. That’s higher than the usual 15% or 20% long-term capital gains rate. Second, you can’t move older stock into the new rules by swapping it in a reorganization. Shares you receive in exchange for stock issued on or before July 4, 2025, keep the old treatment.
Which Deal Structures Preserve the QSBS Exclusion?
The structure of an acqui-hire decides whether a QSBS sale happens at all. Here is how the four common structures treat shareholders.
| What happens | What it means for QSBS | |
|---|---|---|
| Stock sale or cash merger | The buyer purchases the shares, and the whole company changes hands | Usually the cleanest path. You sell the stock itself, so the exclusion can apply if the holding period and other tests are met |
| Tax-free stock-for-stock merger | Shareholders exchange startup stock for the buyer’s stock | QSBS status can carry over to the new shares, but the exclusion covers only the gain that existed on the exchange date |
| Asset sale, then liquidation | The corporation sells its assets, pays corporate tax, and then distributes the cash | Section 1202 never applies to the corporation’s own gain. Shareholders may still treat the liquidation payout as a sale of their stock |
| License-and-hire, also called a reverse acqui-hire | The buyer licenses the technology and hires the team, while the company keeps existing | Nobody sells shares, so there is no exclusion to claim yet. The holding period keeps running |
Across all four structures, the exclusion follows the stock. The more money a deal sends to the corporation instead of to shareholders, the less exclusion you can likely use. That’s why tax planning for acquisitions and mergers works best before the term sheet is final.
What the Deal Structure Means for Founders
Founder shares issued at formation usually follow the pre-OBBBA rules, with a five-year holding period and a $10 million cap. In a true stock sale, the exclusion can cover most or all of a founder’s gain. In an asset sale, by contrast, the corporation pays tax first, and Section 1202 can’t remove that layer of tax.
A Worked Example: Stock Sale vs. Asset Sale
To keep the math simple, picture a hypothetical founder who owns 100% of a startup and has held the shares for more than five years. Both the shares and the company’s assets have a near-zero basis. The buyer will pay between $8 million and $10 million, so the founder’s gain falls in that same range.
In a stock sale, the founder sells the shares directly. Because the gain stays within the $10 million cap, the founder can exclude all of it from federal income tax. That result assumes the stock met the QSBS tests for the whole holding period.
In an asset sale, the corporation sells its assets for the same price. It then owes federal corporate income tax of 21% on the gain, plus any state corporate tax, before any money reaches the founder. At $8 million, that federal tax is about $1.7 million; at $10 million, it’s $2.1 million. Losses from earlier years can reduce that tax if the company has them. The founder may still be able to exclude gain on the liquidation payout, but only on what’s left after the corporate tax.
Both versions carry the same headline price. Depending on basis, state, and any losses the company can use, the gap between them can run past $1 million, and it comes from who sells: you, or your corporation. For that reason, the structure conversation belongs in the term sheet, not at closing.
Two Timing Issues Founders Should Model
The buyer’s stock is the first issue. Suppose the buyer offers its own shares in a tax-free exchange. In that case, the exclusion usually covers only the gain that existed on the deal date. Any growth in that stock after the deal date becomes regular capital gain when you sell, with no exclusion. So a founder who expects it to rise may want to compare that with a cash offer.
The closing date is the second issue. Take shares issued after July 4, 2025. A deal that closes at two years and eleven months gets no exclusion, while one at three years and one month gets 50%. Buyers rarely plan around a seller’s holding period, so it helps to have your CPA track it during negotiation.
A rollover rule can also help. Under Section 1045, if you’ve held QSBS for more than six months, you can often defer the gain. The proceeds must go into new QSBS within 60 days. For a founder who plans to start or back another company, the rollover can keep the tax benefit available for later.
Have a term sheet already? Our CPAs at Fusion can model each structure’s after-tax result for your shares and stock options. Schedule a Discovery Call to review the numbers before you sign.
What Happens to Investors in a License-and-Hire Deal?
In a license-and-hire deal, the buyer pays its licensing fee to the startup itself. That money doesn’t automatically reach preferred shareholders. Investors have criticized this feature. Founders get retention packages from the buyer, while investors hold shares in a company without its team. Separately, in February 2026, three U.S. senators asked the Federal Trade Commission and the Department of Justice to review these deals on antitrust grounds.
For investors, three questions decide the QSBS outcome:
- Is there a sale or exchange at all? If the company simply holds the licensing fee, nobody sold any shares, so there’s no exclusion to claim yet.
- If the company pays out the cash, is it a dividend or a redemption? Dividends get no Section 1202 benefit. A redemption, where the company buys back shares, carries a different risk. Large buybacks can disqualify QSBS status for shares the company issues within a set period around them. That problem may only show up years later, in someone else’s sale.
- Does the company dissolve? Tax law typically treats a liquidation as an exchange of the stock. As a result, the exclusion may apply to whatever gain remains at that point.
Some investors hold consent rights, meaning the right to approve or block certain company decisions. They often use that power to push a deal toward a structure that pays the cap table alongside the team. Otherwise, their exclusion stays tied to a company with no operating business.
What Founders Can Negotiate for Employees Who Stay Behind
In a reverse acqui-hire, founders decide at the deal table what happens to employees who aren’t joining the buyer. That decision directly affects the team’s taxes.
Employees with unexercised options don’t own stock yet, so their QSBS clock hasn’t started. The holding period begins at exercise, not at grant.
Meanwhile, an employee with a deadline to exercise or lose options faces a hard choice, especially after the founders leave. Exercising a nonqualified stock option (NSO) creates ordinary income on the spread, the gap between strike price and share value. That tax comes due even though the shares may be worth far less later.
Incentive stock options work differently. Our equity compensation tax guide explains how their spread can trigger the alternative minimum tax.
If the shares later become completely worthless, the employee akes a capital loss in that year. Beyond any gains it offsets, that loss reduces ordinary income by only $3,000 a year, with the rest carried forward to later years. For most employees, that means a slow recovery.
Founders can negotiate several terms that change this outcome:
- Option acceleration before closing, so options vest sooner.
- A tender offer or secondary sale alongside the deal, which lets employees sell shares for cash.
- A longer window to exercise options after the deal closes.
- Retention pay, funded by the deal, for employees who stay with the startup.
A tender offer structured as a sale of shares can also help employees who exercised early. If their own holding periods have run, they may be able to claim the exclusion on those shares.
Can the Company Left Behind Lose Its QSBS Status?
Yes, over time, and this risk gets the least attention in license-and-hire deals. Section 1202 requires the company to use at least 80% of its assets, by value, in an active qualified business. That test applies during substantially all of each shareholder’s holding period. Picture a company that has licensed out its technology and lost its engineers. Holding mostly cash and royalties, it looks very different from the startup that issued the shares.
Two parts of the rules decide how that company fares:
- Software royalties. Rights that earn active business computer software royalties count as active assets. However, that treatment depends on the company staying in that line of business. A company that only collects payments, with no development work, may not qualify.
- Cash. Cash normally counts as active only if the company needs it for reasonable working capital. Cash held for investment can also count if the company reasonably expects to spend it within two years. That spending must go to research or to growing its working capital needs. After a company’s first two years, this working capital rule can cover no more than 50% of its assets.
Because the test covers substantially all of the holding period, years with no operating business may permanently reduce the exclusion. That can happen to people who did nothing except keep their shares. For that reason, shareholders benefit from reviewing the company’s plans for the licensing money early. At that point, they can still influence how it’s spent.
How Does Georgia Treat QSBS Gains?
As of October 2026, Georgia follows the federal QSBS exclusion. The state’s income tax starts from federal adjusted gross income, so gain you exclude federally usually stays off your Georgia return too.
HB 1199, Georgia’s 2026 conformity law signed on March 20, 2026, adopts the federal tax code as amended by the OBBBA. The law’s exceptions, such as bonus depreciation, don’t include the QSBS exclusion. That means founders in Atlanta’s growing AI startup scene can usually claim the exclusion on both returns.
Other states treat QSBS differently. California, for example, doesn’t conform and taxes the full gain. Several other states decouple or only partly follow the federal rules. If you’re weighing a move before an exit, multi-state tax planning shows how residency rules change the result.
How Fusion CPA Can Help
Our CPAs at Fusion work with AI startups, their founders, and their investors before a sale or acqui-hire closes. We review whether each lot of shares qualifies as QSBS. We also compare the after-tax result of each deal structure for every seat you hold. After closing, we prepare the personal income tax returns that report the sale on Form 8949 and Schedule D. If the company dissolves, we also prepare its final Form 1120. Our wealth planning work then covers the tax side of what you do with the proceeds.
Our services include tax preparation and planning, outsourced accounting, and CFO advisory to owners and high-achieving individuals in 40+ states. Our offices are in Atlanta, Tampa, San Juan, and Park City. Call 404-955-7338 or email info@fusiontaxes.com to compare your deal structures with our CPAs.
About the Author
Trevor McCandless, CPA, MTax, is the founder and CEO of Fusion CPA, which he started in Atlanta in 2011. His work centers on tax strategy for business owners and high-achieving individuals and families. This article was reviewed by Steven Sumners, CPA, MAcc, Senior Tax and Accounting Manager at Fusion CPA.
Sources and References
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- Internal Revenue Code Section 1202, as amended by the One Big Beautiful Bill Act (Pub. L. 119-21, enacted July 4, 2025), including Section 1202(a)(6)(B) on the acquisition date of stock received in an exchange
- Internal Revenue Code Section 1045 (rollover of gain from QSBS to other QSBS)
- Internal Revenue Code Section 1(h) (28% rate on non-excluded Section 1202 gain)
- Internal Revenue Code Section 165(g) (worthless securities)
- Georgia House Bill 1199, signed March 20, 2026 (Georgia IRC conformity)
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Reviewed by Katherine Harrington, CPA, MAFM. Figures verified as of October 2026.
