This post uses hypothetical scenarios for illustrative purposes only. It does not describe any actual client, transaction, or representation, and is not legal advice.
Here is the QSBS story founders almost never hear before signing the LOI in 2026. Picture a founder fielding an unsolicited inbound from a strategic buyer in late 2025. The indicative range is strong. Diligence counsel asks when the founder first received his founder stock, and the founder checks the date — December 2022 — and runs the math on what a five-year hold would mean for his tax bill if he closed in December 2027. The question that surfaces is the one every founder eventually asks: is he now being asked to leave eighteen months of consideration on the table because the Internal Revenue Code says you have to hold for five years to get the Section 1202 exclusion?
The answer has changed. He does not have to wait until December 2027. He can close in December 2026 and still capture seventy-five percent of the Section 1202 exclusion — and if he is willing to close in December 2025, he can capture fifty percent. The five-year rule has not died, but it has been tiered. The change was buried in the One Big Beautiful Bill Act, signed into law on July 4, 2025, and it has not been priced into most of the LOI templates circulating in the months after.
For a founder considering a sale in 2026, the QSBS analysis done in 2023 — and the analysis the company’s tax accountant ran when the entity was formed — is out of date. The new rules favor faster exits, and they favor them in a way that materially changes how a founder should think about timing the LOI.
What Section 1202 used to do
The old rule was simple to state and complicated to apply. Section 1202 of the Internal Revenue Code, the qualified small business stock provision, lets a founder exclude federal capital gains tax on the sale of stock in a qualifying C corporation — but only if the founder has held the stock for at least five years, the corporation had gross assets under $50 million at the time the stock was issued, and the corporation was engaged in a qualifying trade or business (broadly, not a personal-services business, not a financial-services business, not certain other excluded sectors). The exclusion was capped at the greater of $10 million per issuer or ten times the founder’s basis in the stock. The current statutory text at 26 U.S.C. § 1202 tracks the historical version and is worth reading carefully.
The five-year cliff was the most distinctive feature. A founder who sold at four years and 364 days got nothing. A founder who sold at five years got everything (or, more precisely, everything up to the cap). That binary structure shaped how deal lawyers and founders thought about exit timing. The “QSBS clock” became a familiar phrase. Founders who had been issued stock in 2018 spent 2023 telling buyers to wait. Founders who had been issued stock in 2021 were going to spend 2026 doing the same thing.
What OBBBA changed
The One Big Beautiful Bill Act, passed in summer 2025, did several things to Section 1202. For stock issued after July 4, 2025, the new framework applies; for stock issued before that date, the old rules continue. The bifurcation matters, and it matters most for founders who hold stock with a mix of issuance dates — original founder stock issued in 2021, secondary stock issued in 2024, restricted-stock-unit settlements in 2026, and so on. Each tranche carries its own QSBS analysis, and OBBBA did not change that.
The core changes are three. First, the holding-period cliff was replaced with a tiered exclusion. Stock issued after July 4, 2025 and held for at least three years qualifies for a fifty percent exclusion; held for at least four years, seventy-five percent; held for at least five years, the full one hundred percent. The five-year rule survived for full exclusion, but it is no longer a binary. A founder who exits at three years and one day gets meaningful relief. Second, the per-issuer cap was increased from $10 million to $15 million for post-July-2025 stock, with the alternative ten-times-basis cap preserved. Third, the gross-asset threshold for the issuing corporation moved from $50 million to $75 million, meaning that companies that had outgrown the old threshold but not the new one can issue qualifying stock again.
There are other refinements. The eligible-business-activity rules were not substantially changed, but the statutory drafting was cleaned up in several places. The inflation-indexing language attached to the per-issuer cap means the $15 million number will rise in future years. The rolling-over provisions in Section 1045 were not changed.
What the four-year tier does to the LOI
The substantive consequence of the tiered exclusion is that the LOI calculus has shifted. A founder with post-July-2025 stock who is approached at year three by a strategic buyer now has an option the old rule did not give them. They can take a deal at fifty percent exclusion, take a deal at four years for seventy-five percent, or hold for the five-year hundred percent. The arithmetic on those three paths is no longer dominated by tax. Net of tax, a higher offer at year three may beat a lower offer at year five even after accounting for the smaller exclusion. The arithmetic has to be done each time, but it is now an arithmetic question rather than a structural one.
For founders with pre-July-2025 stock, the old binary rule still applies. A founder who received original stock in 2022 and is approached at year four in 2026 has to weigh the buyer’s price against the cost of waiting twelve more months for the full exclusion. Nothing in OBBBA changed that calculation. But many founders hold mixed tranches. A 2022-issued founder block plus a 2025-issued secondary issuance plus a 2026 advisor grant produces three different QSBS analyses for the same human, and an LOI that does not break out the tax treatment by tranche is leaving optionality on the table.
The drafting implication is straightforward. The seller’s tax representative should produce a tranche-by-tranche schedule at the LOI stage showing what fraction of each tranche qualifies for QSBS under which rule, with the holding-period clocks marked to the day. The schedule then gets used in the after-tax sensitivity analysis that informs the negotiation on price and timing. PE buyers in particular will sometimes push for a closing date that is administratively convenient for them — fiscal-year-end, a particular Friday, the end of a quarter — without realizing that a thirty-day adjustment one direction or the other can move the founder across a holding-period tier. The seller’s lawyer is the one who has to surface that point and ask for the closing-date concession.
The gross-asset trap nobody talks about
Section 1202 has always had a quiet trap that the rise of $50 million-to-$75 million-gross-asset companies has made more important. The gross-asset test runs not at the time of sale but at the time the stock was issued. A founder who received stock in 2018 when the company had $30 million in gross assets, and watched the company grow to $200 million in gross assets by 2026, still owns qualifying stock — the issuance-date test was met and the test is not re-run. But the company cannot issue new qualifying stock once it exceeds the gross-asset threshold, and “new” includes things people often think of as not new: certain compensatory stock grants to new hires, certain anti-dilution issuances triggered by down-round protection, and certain stock issued in connection with restructurings.
The OBBBA increase from $50 million to $75 million matters here because it gives a category of companies a second chance. A company that crossed $50 million in 2023 and could not issue qualifying stock for the next two years can — if it remains below $75 million on a post-OBBBA issuance date — issue qualifying stock again. For a founder who has been told that QSBS is “done” for the company because the gross-asset bar was crossed, this is worth re-checking. It matters most for companies that took on debt or capital that drove gross assets above $50 million but have since reduced the balance sheet.
What founders should do in 2026
The right move is to update the QSBS schedule before the next inbound, not after. That means three things.
First, get a clean tranche-by-tranche QSBS analysis from a competent tax practitioner. The analysis should show, for each tranche of stock the founder holds, the issuance date, the issuance-date gross-asset position of the company, the qualifying-business-activity analysis, the holding-period clock, and the applicable exclusion percentage under both the old rules (pre-July-2025) and the new rules (post-July-2025). This is not the work the founder’s CPA usually does. It is tax-practitioner work, and it is worth paying for, because the output is what drives the LOI negotiation.
Second, time the LOI around the holding-period tiers, not around the deal-team’s preferences. A founder whose largest tranche crosses the four-year clock in March 2027 should not be signing an LOI in January 2027 with a sixty-day-to-closing timeline if a ninety-day timeline is available. The marginal cost of waiting four weeks is much smaller than the tax delta. Buyers will sometimes accommodate this. Buyers who will not are signaling a preference for buyer-side optionality, which is information the seller should use.
Third, treat any pre-LOI restructuring as a QSBS event. F-reorganizations, holdco interpositions, equity rolls into NewCo entities — any of these can break or restart the QSBS clock depending on how they are structured. A founder who has been advised to do a pre-sale restructuring without a QSBS analysis being run on the restructuring is being advised badly. The M&A practice we run has seen several deals where the restructuring shaved tens of millions of dollars off the founder’s after-tax proceeds because the QSBS implications of the restructuring step were not modeled.
The doctrine is friendlier now, but the practice has not caught up
OBBBA’s QSBS changes are, on balance, founder-friendly. The five-year cliff was a punitive structure that pushed founders toward worse timing decisions, and tiering it was the right policy move. The higher per-issuer cap was overdue; ten million dollars in 2010 dollars is not ten million dollars in 2026 dollars. The higher gross-asset threshold expands the universe of qualifying issuers, which is also good.
But the deal-practice infrastructure has not caught up. Most LOI templates I am still seeing in 2026 have not been updated to reference the tiered exclusion. Most pre-sale tax memoranda I have read in the last six months either do not mention OBBBA at all or treat it as a marginal refinement rather than a structural change. The first time a buyer’s lawyer asks the seller’s lawyer whether the closing date is QSBS-driven, the question is going to surprise both sides.
Founders should not be on the back foot when that question gets asked. The tax-tier schedule should already be in the seller’s data room, and the seller’s lawyer should already have run the after-tax sensitivity. That is how the value of the OBBBA changes gets captured in the deal, rather than getting left on the table because the practice was set up around the old rules.
If you are a founder evaluating an inbound or planning a sale in the next twelve months, feel free to reach out to my firm manager, Magda, at Magda@montague.law, or fill out our contact form. Mention you read this post.
— John
