If QSB stock is sold at an amount over $10 million or 10x the investment the seller will be taxed their capital gains rate, which is between 0% – 20%. Also, the capital gains on the sale of QSB stock could be eligible for Net Investment Income Tax (NIIT) of 3.8%. Below is an example of taxes paid, but also saved on the sale of QSB stock.
ABC, Inc. issued QSB stock their Seed Round investors five years ago. Brayden Stringer, an LP with Tiger Capital, got a notification that ABC, Inc. was in the process of being acquired by Amazon. Mr. Stringer’s allocation through Tiger Capital in the ABC investment was $2 million. Amazon is purchasing the company for $200 million, which is 20x the post-money Seed Round valuation of $10 million. Mr. Stringer’s return after dilution is $25 million, which is over $10 million and over 10x the return. If the return was 10x it would have been $20 million, not including the initial investment. Therefore, taxes would be $1.19 million (($25,000,000 – $20,000,000) x (20% + 3.8%) at a the highest capital gains tax rate. Although capital gains taxes are $1.19 million, Mr. Stringer saved $4.76 million in taxes ($20,000,000 x 23.8%).
What is a Seed Round?