Founders Selling Secondary and QSBS Rollovers

For startup founders, raising a Series A or B is a big milestone, but it also comes with a new set of (good/exciting…and also stressful) financial considerations. One common move at this stage is selling some personal stock as part of the raise, known as a secondary sale. This lets founders take a little money off the table without giving up control of their company. And thanks to QSBS rollovers, there’s a smart way to do it while keeping taxes in check.

Why Founders Take Money Off the Table

By the time a startup reaches a Series A or B, many founders have been grinding for years without liquidity. A secondary sale gives them a chance to turn some paper wealth into actual cash, helping to:

• Reduce personal financial risk by diversifying assets.

• Cover life expenses, whether it’s buying a home, paying off debt, or simply creating a financial cushion.

• Stay focused on the long game without the stress of being “all in” financially.

Secondary sales aren’t about cashing out completely. They’re about creating some breathing room while continuing to build the company.

How These Transactions Typically Work

In most early-stage funding rounds, investors are focused on buying newly issued shares directly from the company. But in many cases, part of the deal includes a secondary component, where investors buy stock from existing shareholders, including founders.

Here’s how it usually plays out:

• Investors allocate part of the round to buying founder shares, providing liquidity without affecting the company’s cash position.

• The shares are sold at the same price as the primary investment, aligning the founder’s sale with the valuation set in the round.

• Founders keep a significant ownership stake while getting some personal financial security. We tend to see $1M-$4M taken at these stages depending on the size of the funding round.

Why QSBS Rollovers Matter

QSBS offers a huge tax break, but only if you hold your shares for at least five years. The problem? Many of these secondary sales happen before (or very close to) that five-year mark, meaning founders could be on the hook for big capital gains taxes.

That’s where QSBS rollovers (Section 1045 rollovers) come in. This tax provision lets founders defer capital gains taxes if they reinvest the proceeds into new QSBS within 60 days. Essentially, it gives founders a way to take liquidity early without losing the tax benefits they’d get from holding QSBS long term. Thanks to these rollovers, founders don’t need to be afraid of taking some cash off the table when the opportunity arises. With smart planning, they can lock in some financial stability while still preserving the massive tax advantages of QSBS (especially by working with our team to find a suitable rollover option).

For founders navigating secondary sales, understanding QSBS rules and working with the right advisors can make a huge difference. A little strategy here can mean saving 6-7 figures in tax and more flexibility as they continue building their company.