Primary Venture Partner’s co-founder, Ben Sun, recently sat down with Samir Kaji (CEO and founder of Allocate) on Samir’s Venture Unlocked podcast. Amongst the topics discussed, Sun detailed how QSBS played a role in Primary’s recent secondary sale of one of their portfolios. This discussion gives an insight into how QSBS has become an essential tool for enhancing returns in the venture capital industry.
The Strategic Value of QSBS in Secondary Sales
The August 8, 2024, conversation with Ben Sun provides an excellent example of how QSBS optimizes secondary transactions within high-growth, early-stage securities. QSBS provides important tax advantages. Provided that the shares of a business are held for more than five years, the seller may be able to have an exclusion of 100% of capital gains from federal taxes.
“During the peak of the market, we were seeing companies in our portfolio that were getting valuation multiples of 70-80x ARR… And we said, look we can sell 25 – 30% of our position. We can sell in a secondary and be shielded from capital gains from QSBS… wow this is amazing!”
– Ben Sun, Primary Ventures
Tactical Use of QSBS as Applied in Primary
Primary efficiently managed its portfolio and returned capital to investors while maximizing gains and enhancing those gains through the QSBS incentive.
This accompanying article explores how Primary utilized QSBS in parallel with this secondary transaction to maximize after-tax returns for Primary’s investors. It also elaborates on the complex procedure of determining the QSBS qualification of a portfolio and securities possessed by the owners. Primary was very strategic in their planning to make sure that each of the portfolio securities qualified for QSBS and that the deal structure enabled investors to reap the tax benefits.
Transitioning in the New VC Environment
The current market environment, offering limited liquidity via the public markets, has enabled secondary sales to take center stage regarding liquidity management and return enhancement. Ben Sun’s experience also points out that these tools are critical when it comes to changing conditions in the market and the pursuit of better returns on investments.
Ben Sun’s discussion on Venture Unlocked offers a glimpse into optimizing secondary sales through QSBS in addition to the other insights gleaned from his VC experience. His insights into the strategic value of QSBS provide valuable lessons for both seasoned and emerging investors navigating the complexities of the current venture landscape.
To hear the full conversation and more about Ben Sun’s thoughts, listen to the latest episode of Venture Unlocked and go to this link.
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.