Section 1202 QSBS status allows founders and early investors to exclude up to 100% of capital gains on the sale of qualifying C corporation stock held for five or more years, subject to the greater of $15 million or ten times adjusted basis per issuer cap. Once a company goes public, shares issued after the IPO generally do not qualify as QSBS because the gross assets test must be met at the time of stock issuance. Pre-IPO planning should include confirming that founder shares were acquired at original issuance, verifying that the company has met the active business and gross assets requirements throughout the holding period, and completing trust-based exclusion stacking strategies before the IPO if the anticipated gain exceeds the individual exclusion cap. Gurpreet Bal advises founders that QSBS planning must be completed before the IPO because several optimization strategies become unavailable once the company is public.
Founders who received restricted stock subject to vesting should have filed 83(b) elections within 30 days of the stock grant to elect to include the grant date value in income and start the capital gains holding period at grant rather than at vesting. If an 83(b) election was properly filed, the founder's tax basis equals the amount paid for the stock plus any income recognized, and all subsequent appreciation is capital gain. If no 83(b) election was filed, each vesting event triggers ordinary income tax on the fair market value of the vesting shares. Separately, founders who hold unexercised ISOs must model the AMT exposure that will result from exercise, particularly if they plan to exercise before the IPO to start the QSBS holding period or to convert to capital gains treatment. Gurpreet S. Bal coordinates with founders and their personal tax advisors to review 83(b) election status and model the tax consequences of various pre-IPO exercise scenarios.
Once a company becomes public, Section 162(m) limits the corporate tax deduction for compensation paid to covered employees (CEO, CFO, and the three other highest-compensated officers, plus anyone who was a covered employee in any year after 2016) to $1 million per year. The performance-based compensation exception was largely eliminated by the 2017 Tax Cuts and Jobs Act. Compensation in excess of $1 million, including the value of equity award vesting, is non-deductible. Gurpreet Bal advises pre-IPO companies to consider the Section 162(m) impact when designing executive compensation packages and to evaluate whether certain pre-IPO compensation arrangements should be restructured before the company becomes subject to the deduction limitation.
California taxes equity compensation income based on the proportion of services performed in California during the period between grant and vesting or exercise. For founders who have worked exclusively in California, 100% of equity compensation income is California-sourced regardless of where they reside at the time of the IPO or subsequent sale. California does not conform to the federal Section 1202 QSBS exclusion, meaning California will tax the full capital gain on QSBS at rates up to 13.3% even when the gain is excluded from federal tax. Gurpreet S. Bal advises founders to evaluate California source-income rules and the interaction with QSBS planning as part of comprehensive pre-IPO tax planning, including the requirements and timing for establishing bona fide residency in a state that conforms to Section 1202.
Gurpreet's honest take: you cannot plan away all of the tax hits in a large-scale liquidity event like an IPO. You can mitigate, you can time things intelligently, you can avoid the obvious mistakes — but past a certain point there are diminishing returns, and the goal shifts from elimination to optimization. What matters most is having counsel who can discuss securities law and tax law in the same conversation without stopping to write a memo or bring a second person into the room. There are IPO attorneys. There are company and founder attorneys. You want someone who is both — someone who can move fluidly between the securities structure and its tax consequences without a gap. That was true in the earlier era of search-driven advice and it is more true now, when the pace of these transactions leaves less time to assemble the full team for every question.
Gurpreet S. Bal is a Partner at Foley and Lardner LLP in Silicon Valley, where he advises startups, founders, and investors on venture financings, M&A, IPOs, and corporate governance. He has represented clients in hundreds of transactions with aggregate deal value exceeding $60 billion across AI, semiconductors, fintech, and emerging technology. Prior to his career as a corporate lawyer and transaction advisor, he served with the U.S. Department of Justice and as an international and cross-border tax advisor at a Big 4 accounting firm. Gurpreet's recent IPO experience includes leading company representation in the only sub-$1 billion U.S. semiconductor IPO in the last few years.