New tax provisions could help startups get acquired faster and bring bigger tax-free gains to investors.
Under President Donald Trump’s new tax bill, startup founders and investors might be able to turn their equity into a payday sooner than they think.
The « One Big Beautiful Bill » Act, which became law last week, includes some key changes to the tax provisions for small businesses.
The biggest changes are threefold. For one, the provisions now allow companies with larger fundraises under their belts to qualify as small businesses. They also increase the amount of profits that company stakeholders can receive tax-free after selling their shares.
Most importantly, the provisions introduce a tiered system that brings tax benefits to investors faster.
Previously, startup founders and investors were exempt from capital gains taxes on any profits from the company only if they got that profit five years after the stock was issued. That restriction could dissuade founders from taking an M&A deal or secondary sale in a startup’s early years to avoid a massive tax hit.
Now, those profits will be 50% tax-free after three years, 75% after four, and completely tax-free after five.
Venture investors and startups who’ve caught on to the changes, and what they could mean for earlier startup exits, are buzzing.
« With the previous five-year exit minimum, a lot of people don’t get the benefit », said Luke Fischer, cofounder and CEO of geospatial tech startup SkyFi. « I think this looks like a forward-leaning administration that understands the reality of business and what that means for those folks to deploy their hard-earned capital, with the tax-free benefit, back into their own company or into a new company. »Breaking down the changes
The updates to Qualified Small Business Stock rules, or QSBS, expand the definition of a small business to include companies with less than $75 million in gross assets, up from the previous $50 million cap.
Founders, investors, and employees who acquire a stake in a company before it hits $75 million in assets can now cash out down the line and get up to $15 million in profits per taxpayer from a sale of the startup’s shares tax-free, or up to 10 times their initial investment in profits tax-free, whichever amount is greater.
