Your venture-backed company announces a tender offer. You hold QSBS. The question: Does selling destroy your QSBS qualification and cost you millions in tax savings?
For founders with QSBS holdings worth $10 million or more, understanding the tax implications of tender offers is the difference between preserving tax-free gains and writing a massive check to the IRS.
What You’ll Learn
- How tender offers impact QSBS holding periods, and when selling triggers immediate taxation
- Redemption rules that can retroactively disqualify your QSBS even if you don’t participate
- Strategic approaches for maximizing QSBS exclusions during liquidity events
- Critical mistakes that cost founders millions in unnecessary taxes
Understanding Tender Offers
A tender offer is a secondary liquidity event where private company shareholders can sell shares at a predetermined price before an IPO or acquisition. The buyer can be:
- The company itself (share buyback/redemption)
- New or existing investors (third-party tender offer)
- A special purpose vehicle (SPV)
For venture-backed companies staying private longer, tender offers provide liquidity to founders and employees without triggering a full exit.
The Core QSBS Question: Does a Tender Offer Disqualify Your Stock?
Short answer: It depends on the structure, your holding period, and specific redemption rules.
1. Holding Period Requirements
| Stock Issued | Holding Period | Exclusion Percentage |
|---|---|---|
| Before July 5, 2025 | Less than 5 years | No QSBS exclusion |
| Before July 5, 2025 | 5+ years | 100% exclusion (up to $10M or 10x basis) |
| After July 4, 2025 | Less than 3 years | No QSBS exclusion |
| After July 4, 2025 | 3 to 4 years | 50% exclusion |
| After July 4, 2025 | 4 to 5 years | 75% exclusion |
| After July 4, 2025 | 5+ years | 100% exclusion (up to $15M or 10x basis) |
Critical rule: Your holding period starts when you initially acquired the stock. Participating in a tender offer before satisfying the required holding period means you forfeit QSBS treatment on shares sold.
Example: Sarah exercised ISOs in August 2023. Her company announces a tender offer in December 2025. If she participates, she gets no QSBS exclusion (only 2.3 years held). If she waits until August 2028, she gets a full 100% exclusion.
The decision: Sell now at 23.8% tax or wait for potential $0 tax?
2. The Redemption Rules That Retroactively Disqualify QSBS
This is where founders get blindsided. Section 1202(c)(3) contains anti-churning redemption restrictions that can retroactively disqualify QSBS even for shareholders who don’t participate.
The two-year window rule: Stock is disqualified as QSBS if the corporation redeems more than 5% of its stock by value during the two-year window beginning one year before the stock issuance and ending one year after.
| Timeline | Redemption Limit |
|---|---|
| 12 months before your stock is issued | Corporation cannot redeem > 5% of total stock value |
| Your stock issued | N/A |
| 12 months after your stock is issued | Corporation cannot redeem > 5% of total stock value |
Critical implication: A company redemption tender offer exceeding 5% can disqualify QSBS for shares issued during the affected window, even for non-participating shareholders.
Example: Your company runs a $50M share buyback in June 2025, representing 8% of total equity value. Any stock issued between June 2024 and June 2026 is disqualified from QSBS treatment, even for employees who didn’t participate.
3. Third-Party Tender Offers: The Safer Structure
A third-party tender offer where investors purchase shares directly from selling shareholders generally avoids Section 1202(c)(3) redemption problems because the company isn’t redeeming its own stock.
| Feature | Company Redemption | Third-Party Purchase |
|---|---|---|
| Buyer | The company itself | Outside investors |
| Redemption rules apply? | Yes (5% limit triggers) | No (not a redemption) |
| QSBS holding period | Starts from original issuance | Starts from original issuance |
Important caveat: Even in third-party tender offers, if you haven’t satisfied the required holding period, you forfeit QSBS exclusion on shares sold.
Tax Treatment: What You’ll Actually Pay
If You’ve Met the QSBS Holding Period
Stock issued before July 5, 2025 (5+ year holding period met):
| Component | Rate | On $10M Gain |
|---|---|---|
| QSBS Exclusion | 100% | ($10,000,000) |
| Taxable Gain | $0 | $0 |
| Federal Tax Owed | $0 | $0 |
Stock issued after July 4, 2025 (4.5-year holding period, 75% exclusion):
| Component | Calculation | Amount |
|---|---|---|
| Total Capital Gain | $10,000,000 | |
| QSBS Exclusion (75%) | $10M × 75% | ($7,500,000) |
| Taxable Gain | $2,500,000 | |
| Federal Tax (23.8%) | $2.5M × 23.8% | $595,000 |
If You Haven’t Met the QSBS Holding Period
Example: $10M gain, 2-year holding period
| Component | Rate | Amount |
|---|---|---|
| QSBS Exclusion | 0% | $0 |
| Taxable Gain | $10,000,000 | |
| Federal Tax (23.8%) | $2,380,000 |
The cost of selling early: $2,380,000 in federal taxes that could have been $0 by waiting.
State Tax Considerations
California and other non-conforming states don’t recognize QSBS exclusion:
| State | QSBS Treatment | Tax on $10M Gain |
|---|---|---|
| California | No conformity | ~$1,330,000 (13.3%) |
| New York | Full conformity | $0 |
| Texas | No income tax | $0 |
| Pennsylvania | No conformity | ~$307,000 (3.07%) |
Should You Participate? Decision Framework
| When Participating Makes Sense | When Waiting Is Better |
|---|---|
|
|
Common Mistakes That Cost Millions
Mistake #1: Selling weeks before holding period satisfaction
Example: $8M tender offer gain, 4 years 11 months holding period
- Sell in tender: $1,904,000 federal tax (no exclusion)
- Wait 1 month: $0 federal tax (100% exclusion)
Mistake #2: Assuming all tender offers are QSBS-neutral
Company redemption tender offers exceeding 5% can disqualify QSBS for shares issued during two-year windows, even for non-participants.
Mistake #3: Ignoring state tax implications
California founder with $10M tender gain:
- Participate now: $2,660,000 CA tax
- Establish Nevada residency, participate later: $0 CA tax
Mistake #4: Exercising options specifically to participate in tender offer
Starting your holding period clock at the worst possible time results in zero QSBS benefit for 3-5+ years.
The Bottom Line
QSBS exclusion can save you $2M to $3.5M per $10M to $15M in gains. Don’t forfeit that benefit by selling in tender offers without understanding the tax implications.
Your Decision Checklist
- Holding period status: Have you satisfied the required holding period?
- Tender structure: Company redemption (complex) or third-party purchase (simpler)?
- Redemption percentage: Does a buyback exceed 5% and affect other shareholders?
- QSBS cap planning: Will participation help optimize against exclusion limits?
- State tax planning: Is participation aligned with residency change timeline?
- Exit timeline: Is full exit 6-12 months away (wait) or 3-5 years away (participate)?
- Liquidity needs: Do immediate financial needs outweigh tax optimization?
The core principle: Don’t forfeit multi-million dollar QSBS benefits by selling in tender offers without proper planning.
Planning Your Tender Offer Strategy
If your company is considering a tender offer or you’ve received tender offer documents, address QSBS planning now. The difference between an optimized tender offer strategy and an ad-hoc decision can easily exceed seven figures in tax savings for venture-backed founders.
Contact Keystone Global Partners to evaluate your QSBS position and develop a tax-optimized tender offer strategy that preserves your exclusion benefits.
Contact Keystone Global Partners to discuss your tender offer and QSBS strategy
Disclaimer: This information is for educational purposes only and does not constitute legal or tax advice. Consult qualified tax and legal professionals regarding your specific situation.
Sources
- 26 U.S. Code § 1202 – Partial exclusion for gain from certain small business stock
- H.R.1 – One Big Beautiful Bill Act of 2025 – 119th Congress (2025-2026)
- 26 U.S. Code § 302 – Distributions in redemption of stock
- SEC Tender Offer Rules – Securities Exchange Act of 1934
- IRS Revenue Ruling 85-13 – Grantor Trust Treatment
- Treasury Regulation § 1.302-2 – Redemptions not taxable as dividends
- Carta: What is a Tender Offer? How It Works & Tax Treatment
- Graphite Financial: How to Preserve QSBS Status Through Series A to Exit
- Frost Brown Todd: Section 1202 (QSBS) Planning for Sales, Redemptions and Liquidations
