Why this matters
QSBS lets eligible founders exclude the greater of $10M or 10x basis in capital gains on a qualifying sale of shares in a Section 1202 corporation, held for at least five years. For a founder selling a position worth $20M, the federal tax saving can exceed $4M. The five-year holding period is, in practice, the single most fragile element of the requirement.
Events that restart the clock (and shouldn't)
Most commonly: a recapitalization that converts founder common into a new class of common; a stock split documented incorrectly; or a merger into a holding entity where the holding entity issues new stock to the founder. Each can inadvertently reset the five-year holding period unless the transaction is documented as a Section 351 or 354 reorganization with appropriate basis and holding-period tacking.
- Section 351 contributions properly documented — holding period tacks
- Section 354 / 368 reorganizations — holding period generally tacks
- True recapitalizations (Section 1036 exchanges) — holding period tacks
- Surrender and re-issuance of stock — clock restarts (avoid)
Events that don't restart the clock
Subsequent issuances of stock to other investors (Series A, B, etc.) don't affect founder QSBS status. The corporation's gross-asset limit ($50M) is tested at the time the founder's stock was issued, not at later issuances. Convertible note conversions to preferred stock don't restart the clock for the founder's common shares.
Documentation discipline
AION's QSBS module captures the contemporaneous records that will matter five years from now: stock ledger with original-issuance dates, gross-asset balance sheets at each issuance date, active-business test documentation for each year, and tacking analyses for any reorganization. The diligence file is built at the time of the transaction, not reconstructed at exit.