Although many entrepreneurs and investors are intrigued by the potential tax advantages of holding Qualified Small Business Stock (QSBS) under Section 1202 of the Internal Revenue Code of 1986, many avoid the approach due to a misconception that it is only available when directly investing in early-stage businesses. There is, however, a range of techniques for securing QSBS tax benefits in a broad number of contexts, including when investing through a private fund with non-traditional instruments (e.g.
, convertible instruments). In a two-part guest series, Neal Gerber Eisenberg attorneys Michael B. Gray, Jeffrey S. Shamberg and Eric M. McLimore provide insights about QSBS tax treatment and practical tips for how fund managers can take advantage. This second article explains how fund investments, Simple Agreements for Future Equity and convertible instruments can receive and preserve QSBS status. The first article
identified techniques for converting certain existing businesses operated through non-qualifying “flow-though” or “pass-through” entities into qualified small businesses. For coverage of another tax-advantageous investment technique, see “Final Regulations Clear the Way for PE‑Backed Opportunity Zone Investments in 2020 and Beyond
” (Mar. 31, 2020); and “What Unique Tax and Structuring Challenges Do Qualified Opportunity Funds Present to Sponsors and Investors?
” (Jun. 25, 2019).