If you are an investor, and you are considering investing in the stock of a startup or early stage company sometime between now and the next few months, for tax reasons it might be a very good idea to get the deal done before year end.


Because Congress has passed a law that the President has signed which exempts you entirely from tax (including AMT!) on gains on that investment if you hold it for more than 5 years, if the investment is in "qualified small business stock." (Caveat: your gain that will be excluded from tax is capped at the greater of $10M or 10X your investment, in general.)

Qualified small business stock is, generally, stock in a domestic C corporation (another reason, founders, to start as a C corporation) acquired at its original issue if the corporation has less than $50M in gross assets both before and after the investment, at least 80% of the assets of which are used in active conduct of a "qualified trade or business." "Qualified trade or business" excludes certain service business, but in general will include most early stage technology companies.

Now, granted, you are not going to want to let tax considerations drive your investment decision making, but if you have already decided to make an investment, and you are coming down to the wire in getting the deal done by year end or not, you will probably want to get it done by year end if the investment is in qualified small business stock.

For Wall Street Journal coverage of this tax issue, see here.

For the rules on what constitutes qualified small business stock, see Section 1202 of the Internal Revenue Code. Please call us if you have any questions.