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Tax-efficient Exit Strategies for IPOs: Unveiling Founders Stock Benefits

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Tax-efficient Exit Strategies for IPOs: Unveiling Founders Stock Benefits

The Initial Public Offering (IPO) is a highly recognized success for many entrepreneurs because their entity becomes public and its ownership is distributed among shareholders. Along with success and achievements, it brings out various risks that every entrepreneur must consider to make their triumph and victory the most solid and concrete.

It is quite evident that the foremost responsibility of the founder is to maximize the return on years of hardship and apply the strategic exit strategy that minimizes the tax burden.

We will disclose all the tax-efficient strategies for founders in 2024 in this blog, with a particular focus on unlocking the benefits of your founder’s stock.

Capital Gains Taxes: A Broad Picture:

Capital gains arise when you sell the company’s stock after an IPO after sustaining some of the holding period. The tax rate normally defines the period of holding and your total taxable income.

The breakdown of rates as per the criteria is discussed below:

Short-Term Capital Gains:

Short-term capital gains arise when you hold the stock for less than one year. This is generally taxed at the ordinary income tax rate, which is 37% in 2024.

Long-Term Capital Gains:

Long-term Capital gains arise when you hold the stock for more than one year, and that is taxed at lower rates, such as a maximum of 20% for various taxpayers in the year 2024.

From the above passage, long-term gains provide an immense tax advantage. But for founders, the substantial consideration lies in leveraging the power of:

Qualified Small Business Stock (QSBS): A Founder’s Tax Heaven:

It is a widely accepted fact that QSBS is a watershed moment for the founders as well as for the early investors in successful startups. Let’s discuss the point why is that so:

Tax Exemption Possibilities:

As per the Tax Cuts and Jobs Act of 2017 (TCJA), up to 100% of capital gains can be exempted from federal income taxes on the sale of QSBS-qualified stock. This condition and clause are still valid in the year 2024.

Increased Lifetime Exemption Limit:

The lifetime exemption on QSBS gains has been increased to $10 million; however, in a previous year, such a limit was up to $5 million per taxpayer. This has added significant value for the founders and early investors. In addition, the married couple, if jointly filed, can get an exemption of up to $20 million.

How to Qualify for QSBS: Unveiling Facts:

Not all entities and stocks qualify for QSBS, and here we would know why:

Company Requirements:

The company or entity must be a domestic C corporation with less than $25 million in gross assets before issuing stock.

Holding Period:

The company must hold the stock for at least five years to qualify for full exemption.

Beyond QSBS: Additional Founder-Friendly Options:

Although QSBS is a strong tool, it is not the only one where your dependency should prevail. Some other options offer you somewhat similar advantages, which are elucidated below:

Employee Stock Ownership Plan (ESOPs):

In this option, you can avail yourself of the opportunity to sell a portion of your company to an ESOP and enjoy the tax benefits for both you and your employees.

Staged Liquidity Events: 

Minimize your tax burden by spreading out your stock sales over multiple years. 

Charitable Donations: 

Under such donations, your tax liability is reduced if you transfer the appreciated stock to qualified charities.

Bottom Line:

Founders Stocks has been providing entrepreneurs with greater tax relief benefits. To help maximize returns and minimize tax liabilities, understanding and implementing these tax efficient exit strategies is of primary concern. However, if you need assistance in implementing or understanding any of these tax strategies, our team of tax professionals at is readily available to assist you at your convenience. 


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