Key Updates Founders Should Know About QSBS in 2025
A huge change just went into effect regarding the Qualified Small Business Stock (QSBS) exclusion, one of the most powerful tax advantages available to startup founders and early investors. The exclusion allows eligible shareholders to eliminate millions in capital gains tax at exit, but for years, access was limited by strict rules and narrow eligibility thresholds. However, that changed as of July 4, 2025.
With the passage of the One Big Beautiful Bill Act, the landscape around QSBS has shifted. More companies now qualify, more shareholders can benefit, and for the first time, partial tax exclusions are available at earlier exit points. These changes present an important opportunity, but only if founders understand the rules and document eligibility properly.
Here’s what every founder should know about the 2025 update.
Major QSBS Updates Founders Should Know
Larger Companies Now Qualify
The gross asset threshold for QSBS eligibility has increased from $50 million to $75 million. As one Redwood expert put it, “The universe of companies that are now eligible is greatly expanded.” The expansion, which is now indexed for inflation, opens the door to thousands of companies that previously would not have qualified. For founders, that means more flexibility when raising capital and structuring growth without losing access to QSBS benefits.
Higher Exclusion Cap
Under the updated rules, shareholders can now exclude up to $15 million in capital gains, or ten times their basis in the stock, whichever is greater. This is a 50% increase from the previous $10 million cap and a substantial opportunity for early-stage investors and employees alike.
Partial Exclusions at Earlier Exit Points
Perhaps the most founder-friendly change is the introduction of tiered holding periods. Previously, the benefit only applied after five years of holding qualified stock; however, founders can now start realizing exclusions earlier. Here’s how the new tiered exclusions break down:
50% of gains are excluded after three years
75% after four years
100% after five years
“It used to be five years or nothing,” one Redwood team member said. “Now there’s a much greater chance to actually use it.” But there’s one small hitch: timing matters.
Effective for Stock Issued After July 4, 2025
It’s important to note that these updates only apply to stock issued on or after July 4, 2025. Any shares issued before that date will still fall under the prior rules. If your company is issuing equity now, or planning to soon, the timing could be a critical factor in determining eligibility.
What Founders Need to Watch For
Track Issuance Dates Carefully
QSBS eligibility hinges on the date shares are issued. That means timing matters not only for common stock grants, but also for SAFE conversions, option exercises, and early exercises. These events can all trigger a new issuance date, which resets the holding period clock. Founders should work closely with legal counsel and valuation professionals to properly document each milestone.
C-Corp Status Is Still Required
QSBS only applies to C-corporation stock. LLC units do not qualify. For companies that have converted from an LLC to a C-corp in the past, a retroactive valuation may help establish eligibility as of the conversion date. “If they converted from an LLC to a C-corp in 2021, we can do a valuation at that date to help them establish QSBS eligibility,” a Redwood expert explained.
More IRS Attention Is Likely
With greater benefits comes greater scrutiny. The increased asset threshold and exclusion cap make QSBS more valuable, but also more likely to attract IRS review. That means clear, defensible documentation is essential. Founders should be prepared to show valuations, gross asset calculations, and evidence of eligibility if challenged.
How Redwood Helps Support QSBS Compliance
Redwood offers QSBS support as either a standalone engagement or as an addition to your 409A valuation. For a small additional fee, Redwood can prepare a QSBS summary letter that includes fair market value and gross asset calculations as of the relevant issuance date. These letters help your legal and tax teams assess and support QSBS eligibility with confidence. And while the letter doesn't say they qualify, it does provide the data needed to support QSBS status.
Since the July 4th rule changes, Redwood has noticed an uptick in companies reaching out to revisit their QSBS planning, particularly in cases where they previously didn't qualify or had opted not to pursue QSBS analysis. In many of these cases, the expanded thresholds have now made it possible to unlock significant new tax benefits, and Redwood is here to assist in revisiting eligibility.
However, it should be noted that Redwood avoids offering legal opinions on whether a company qualifies and instead focuses on valuation clarity that substantiates eligibility. Our team delivers audit-ready valuation analysis that supports your counsel’s determination. By collaborating with Redwood, you’re ensuring that your advisors are equipped with accurate, audit-ready data they can trust. That partnership helps protect founders, streamlines compliance, and creates a stronger foundation for claiming the QSBS exclusion with confidence.
What Founders Should Do Now
Whether you’re planning your next round, updating your cap table, or evaluating exit scenarios, now is the time to integrate QSBS planning into your broader equity strategy. Here’s what Redwood recommends:
Consult your legal and tax team, especially if you’re issuing new stock after July 4, 2025
Include QSBS analysis in your next 409A valuation to document asset thresholds
Keep detailed records of all share issuance dates and entity structure changes
If you’ve recently converted to a C-corp, consider a retroactive valuation
Provide QSBS documentation proactively to investors who may request proof
As one Redwood expert put it, “It’s just good hygiene—and now that a lot more people qualify, there’s no reason not to have it on file.”
Conclusion: Don’t Miss the Window
The changes to QSBS under the One Big Beautiful Bill Act are a game changer. They expand eligibility, shorten holding periods, and increase the potential tax savings for founders and early shareholders. However, these benefits aren’t automatic and require proactive planning, precise documentation, and sound valuation support.
“QSBS used to be a long shot,” said one Redwood expert. “Now, it’s a real opportunity for founders and investors to save millions in taxes…but only if you plan ahead.”
If your company is issuing equity this year, or if you’re not sure whether prior issuances qualify, Redwood can help you build QSBS documentation directly into your 409A process, or deliver it as a standalone valuation. The sooner you start tracking eligibility, the better positioned you’ll be when an exit opportunity arises.
