QSBS Spotlight: Mercury Raises $300M, Making More Liquidity Available
A weekly series where we cover recent acquisitions, capital raises, and pending IPOs that may be Qualified Small Business Stock (QSBS) tax exemption eligible, granting investors and planners insight into real world planning opportunities using QSBS rollovers.
Digital banking startup Mercury has raised $300 million in a Series C round at a $3.5 billion post-money valuation. This valuation is more than double the company’s last funding in 2021 (a $120 million Series B at a $1.62 billion valuation). The majority of the new round’s capital is primary funding, but some existing shareholders sold stock as secondary liquidity. The round includes plans to use a portion of the funds for an upcoming employee tender offer (a broader opportunity for employees to sell shares). In short, Mercury’s post-money unicorn valuation not only reflects its rapid growth, but also provides a significant liquidity options for founders, early investors, and long-time employees.
From Mercury’s press announcement.
It’s quite common at the Series B/C stage for founders and early backers to take some money off the table, especially after being in the business as long as Mercury’s team (about 8 years since founding). When this happens and the stock is QSBS-eligible (meeting the criteria of Section 1202), those shareholders have a chance to reap tax-free gains. In Mercury’s case, any founder or early employee whose shares qualify as QSBS now faces a key decision on how to maximize their tax benefit from this partial liquidity event. Two main QSBS paths typically come into play for such secondary sales:
Option 1 – Use the QSBS Exclusion: Shareholders who have held stock for more than 5 years can opt to use some (or all) of their Section 1202 QSBS exclusion, which allows up to $10 million of gain (per issuer) to be tax-free at federal level. Utilizing the exclusion on this sale would mean the immediate gains from selling Mercury stock are federally tax-free (and for most state gains tax). The trade-off is that it reduces the remaining QSBS benefit available for future sales of Mercury stock by that shareholder – whatever amount is excluded now counts against their total $10M exclusion limit when selling Mercury stock.
Option 2 – Utilize a QSBS Rollover: Alternatively, the shareholder could choose a QSBS rollover by claiming deferral of the gain. This means they reinvest the sale proceeds into a new qualified small business within 60 days, rather than recognizing the gain now. By rolling over, they defer the capital gain from the Mercury stock sale (no immediate tax due) and preserve their full $10M QSBS exclusion cap for Mercury’s stock in the future. Crucially, this also starts a new QSBS investment – effectively creating another potential $10M tax-free gain cap on the replacement QSBS if that investment meets Section 1202 requirements. In short, a rollover lets a founder or investor keep their powder dry on Mercury’s QSBS exemption for a later, potentially larger exit, while still keeping their present gains tax free.
NOTE: If a shareholder’s Mercury stock has been held for less than five years (the minimum holding period for the QSBS 100% gain exclusion), a rollover is essentially the only way to obtain tax relief on a sale. In such cases, the Section 1202 exclusion isn’t available yet, so deferring the gain under Section 1045 is the sole strategy to avoid current capital gains tax in the future. The rollover allows the investor to extend the QSBS holding period by moving into replacement QSBS without triggering tax now – effectively the “clock keeps ticking” on that 5-year requirement in the new stock’s holding period.
For Mercury’s founders and early employees who will sell a portion of their holdings, this Series C liquidity event opens the door to these QSBS planning opportunities right away. And with a broader employee tender offer on the horizon, many more Mercury staff and early investors may soon face similar decisions. By planning ahead, they could potentially extend their QSBS holding periods or even multiply their $10M exclusions through strategic use of rollovers.
In practice, a well-timed QSBS rollover with QSBSrollover.com can enable a shareholder to defer today’s gains and stack multiple tax-free opportunities – preserving the full $10M exclusion on Mercury stock for a future exit, and gaining a new $10M exclusion potential on the next investment. It’s an opportune moment for anyone holding QSBS-eligible shares of Mercury to talk with our team or consult with their tax advisors or QSBS planning specialists. With Mercury’s valuation surging and liquidity options expanding, the right QSBS strategy can help maximize the tax-free upside on both current and future gains.
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You could benefit from a QSBS rollover if:
You recently sold QSBS before the 5 year minimum hold period
You recently sold QSBS that you held for 5 years, but your gain exceeds $10M
You’re considering an exit in the next 1-4 years and want to think ahead about tax planning
Are an angel investor seeking flexible QSBS opportunities to help defer gains
The Vint Retail Partnership Program can be a solution for QSBS gain holders in need of a flexible, low-risk, and relatively liquid QSBS opportunity. Get in touch with our team today to learn how to partner with us and potentially save millions in gains tax from a stock sale.
Here are some of the questions we typically ask when having a first meeting with potential partners:
Did you recently sell or are you holding Qualified Small Business Stock?
When did you sell your stock?
Was this your first liquidity event?
Are you a founder, early employee, outside investor/angel, etc?
Are you certain that your stock met the Active Trade/Business and other requirements under Section 1202? (Outside of holding period requirements)
What is your intended rollover amount?
How long did you hold your initial stock?
(Read more about QSBS planning and see some example situations)
