QSBS ROLLOVERS

BRADY WELLER discusses the intricacies of QSBS rollovers, including eligibility, timing, and strategic planning for founders and investors. The goal is to help the listener maximize tax benefits and navigate the legal complexities of this powerful tool. https://youtu.be/gvQ0ZskvWVI QSBS, tax exemption, startup founders, rollover, legal structuring, investment strategy, tax planning, startup exit, C corporation, Key Topics QSBS eligibility and benefits Challenges in executing rollovers Legal and tax considerations for founders Timing and risk management in rollovers Strategic structuring for maximum benefit "QSBS ROLLOVERS" Sound Bites "60 days is a very short window for founders." "Rollover continues your holding period clock." "Partial rollovers are common for founders." Chapters 00:00 Understanding QSBS and Its Benefits 03:07 Challenges for Founders in QSBS Compliance 05:54 Advising Founders on QSBS Rollovers 08:57 Structuring New Ventures for QSBS Eligibility 12:00 Navigating QSBS for Tech and Non-Tech Founders 14:54 Investor Considerations in QSBS Transactions 17:46 State-Specific QSBS Regulations and Planning 20:57 Future of QSBS and Strategic Planning Resources Brady Weller on LinkedIn qsbsrollover.com qsbsreference.com Frazer Rice and Michael Arlein discuss the nuts and bolts of 1202 QSBS Features for Founders Guest links LinkedIn Transcript Frazer Rice (00:01.314)Welcome aboard, Brady. Brady Weller (QSBS Rollover) (00:03.043)Hey, Frazer, thanks for having me. Frazer Rice (00:04.738)Well, you are the nice compliment to a piece I just did with Michael Arlene on QSBS. We covered some of the nuts and bolts around 1202. You come at it from a little bit different angle. It's usually where people, founders especially, have issues sort of complying with things like the three and five year rule. And otherwise really maximizing the capability of the rollover and the tax significance for it. Tell us a little bit about who benefits and what you do here. Brady Weller (QSBS Rollover) (00:35.107)Yeah, QSBS is. by far the biggest tax exemption available to individual taxpayers in the U.S. So it's been something that hasn't been up. I should say there's not a massive advisory network around it. So it's not something that's been taken advantage of, I think, to its full scope. Michael, who you had on recently, is a top trust and estate planner for founders of companies around QSBS. The specific problem that QSBS rollover solve is for a shareholder of an early stage company. Most often founders or very early investors, say, maybe series A or earlier shareholders. It's an incentive to basically hold your stock for a quote unquote long time. In this sense, that means, you know, now under some new rules, basically three to five plus years. It's a tax exemption available to folks who hold their stock for at least five years. Then they can exclude from federal income tax now up to $15 million of gains when they sell that stock. So you have to be a shareholder in an early stage C corporation, early stage company. Frazer Rice (01:50.616).Those founders before three to five years are trying to figure out how to use this tool. What are the challenges in making sure they don't blow up the transaction by transferring something poorly. Or having their company grow too large or have too much cash or those types of things? Maybe list out a little bit some of the challenges that are out there that that a founder needs to be aware of. Brady Weller (QSBS Rollover) (02:22.509).Yeah. So we don't have to constantly caveat. I'll mainly talk as though we're speaking about the pre July 5th, 2025 rules for QSPS. Anything, any stock issued after that date, middle of last year. is under a slightly different set of rules. They are more expanded rules, but I'll speak to this sort of from those old rules. And so the old rules state that you have to hold your stock for at least five years. And if you do, you can exclude a large portion from federal income tax, usually $10 million for founders. But if you don't hold the stock for five years, your only option is to take the cash from that sale. For example, say you sell stock at year three or year four, and purchase new QSBS eligible stock with that cash within 60 days. So it's sort of like the 1031 exchange. Folks maybe are more familiar with real estate property exchanges. Its sort of like a 1031 exchange for stock. So you take the cash and you purchase a like kind quote unquote asset with it. Now the challenge with that is 60 days is not a very long time. And when you're a founder of a company who just went through liquidity. You just got your deal done and the whirlwind that that is. Now you're dealing maybe in a post liquidity world. You're maybe running another team at the acquirer or you're otherwise involved. 60 days is not a long time to be able to find and diligence a new opportunity. . It's just not feasible. Especially for founders to use that cash to say buy stock in someone else's company. It just doesn't make sense. Like risk adjusted, I suppose. Frazer Rice (04:05.579)No, it's a miracle that your company did great. Now you have to go and find another miracle and make it work within 60 days. It's crazy. Brady Weller (QSBS Rollover) (04:10.143).That that's the biggest that's probably the biggest barrier to executing them. For the longest time there just weren't a lot of people. They hadn't come alongside founders to help advise them on structured ways that they could do these rollovers. Yeah, the options are risky. It's like take your money and invest it in Dave's startup in San Francisco. He's going to lose your money. So that may be what you want to do with that money. To keep your risk profile sort of moving. But that's not tax planning in any way. Right. To make that decision just to save on federal income tax might not be the best way to use your rollover. So we've seen it much more for angel investors, something that they might use. People who want to maybe have a lot of deal flow. A lot of investment opportunities in front of them. But they want to keep that risk profile moving. I'd say timing and risk are the two biggest challenges when you're trying to execute a rollover. Frazer Rice (05:13.805).As a detail on that, you've got your company. You've got $10 million coming to you. Hopefully tax free, similar to a 1031. You don't have to go into one company, you could go into a basket of companies. Brady Weller (QSBS Rollover) (05:28.579).Yeah, you could take the cash, say you make $10 million from a sale. You could pay taxes on $3 million of it, assuming you haven't hit your five year requirement. Then, you could roll over the other seven in various other deals. You could put it all into one new company. What the rollover actually does is it continues your holding period clock from the last stock. So if you held for three years in your original company stock, You sell. You're able to reinvest those proceeds within 60 days. It continues your holding period. Once you're beyond a combined five the next liquidity event in the second company. Now you have proper seasoning on your shares, for lack of a better word, and then you can sell them under the QSPS exemption. Frazer Rice (06:17.143)So, this gets to what you do on a day-to-day basis. So a founder comes to you and says, all right, I've got this situation I think that's coming. And I need some advice. You're sort of letting them know what's happening here. How do you advise them, in a sense, whether it's through your company or even as a general matter? Do you have a suite of other founders and companies that are out there? And then… Maybe also similar to a 1031, is there sort of an intermediary function that needs to happen in order for the asset or the cash to go into sort of a, for lack of word, like an escrow account to then be deployed correctly into the eligible next company so that you keep that period going. Brady Weller (QSBS Rollover) (06:50.713)Boom. Brady Weller (QSBS Rollover) (07:05.839)That's a good question. It's not as formalized as the, you know, in terms of the 1031 world where there's sort of a designated intermediary and that's sort of required step in the process. This is very much the wire goes into your checking account for the sale of company A stock. Frazer Rice (07:11.703)Mm-hmm. Brady Weller (QSBS Rollover) (07:22.281)You send a wire back out to purchase stock in company B. When someone comes to us and is looking for guidance on how to do a rollover, sometimes they've talked to tax or trust in state attorneys already, or maybe they're CPA. And there are maybe 50 folks in the US who have, I'd say, Frazer Rice (07:37.463)Sure. Brady Weller (QSBS Rollover) (07:45.07)I call it advanced QSPS planning knowledge, which is they have the trust planning strategies, rollover knowledge, all of these things that sort of at their disposal that they can speak to, but it's a very small network. so our firm is actually the only non-CPA non-law firm in the country that deals directly with founders on these. And so we ended up kind of playing quarterback, connecting them with the right attorneys, maybe the right CPA, if they don't have one to make sure that the team is sort of assembled. You know, because the risk profile of taking your money and investing in someone else's company typically doesn't align with most founders' interests at that time, the service that we provide is helping them to roll that money into a new startup of their own. We think these founder-led rollovers where the founder or the shareholder who sold their original stock can now direct the proceeds into a new entity that they own and control. It's a really great way to execute this. It gives the shareholder, the founder the optimal amount of flexibility and co