Early employee with exercised startup options? How to check QSBS before a tender offer

Which startup shares pass the Section 1202 tests?

Startup shares pass Section 1202 when the company was a domestic C corporation, you acquired the shares directly from it at original issuance for money, property or services, and the company met the IRS asset and business tests when the shares were issued. Exercised options and delivered, vested RSUs count. Shares bought from another holder on a secondary market do not.

Lan faced exactly this question with her 20,000 exercised shares. The company's gross assets had to be under the statutory limit on her issue date (check the current IRS figure, because it changed for newer stock). At least 80% of assets had to be used in an active business. Financial services, consulting, law, health and banking are excluded fields, while a typical software or chip-design startup passes the field test.

The holding period comes next. Stock issued before the July 4, 2025 rule change generally needs more than 5 years from exercise. Newer stock has a tiered schedule: 50% excluded at 3 years, 75% at 4, 100% at 5. The gain cap per company also differs by issue date, so use the IRS's current limits rather than figures you remember from older articles.

Raj and Lan's $1.4 million of public chip company stock does not qualify. It came through market purchases, ESPP buys and RSUs from a company far above the gross-asset limit, so nothing in their playbook should count on QSBS for those shares.

The company tests

The holding period

Check eligibility in this order before any tender offer

Lan's first move was paperwork, not math. Section 1202 depends on facts about the company as of her issue date, and only the company can confirm them. Work through these steps in order.

Edward Jones Investments adds a one-page lot schedule to the household's playbook. It shows each exercise date, the holding-period end date, and the federal tax at sale before and after that date.

• Pull every exercise confirmation from the equity portal or the old employer's stock administrator, with dates and share counts.
• Email the company's CFO or counsel and ask for a written statement that it was a C corporation and under the gross-asset limit on each issue date.
• Ask whether the company redeemed (bought back) significant stock in the 2 years before or after your issue date, because certain redemptions can disqualify shares.
• Count the months from each exercise date to the end of its holding period, lot by lot, since different exercise dates finish on different days.
• Put those dates next to your spending due dates: house, tuition, a job change.
• Have your CPA confirm before the sale, then report the exclusion on IRS Form 8949 and Schedule D for the year of sale.

Does a tender offer at year 3 beat holding past year 5?

Holding past year 5 beats the year-3 tender only if the share price at sale stays above the break-even, about $19.29 a share in this case, roughly 23% below the $25 offer. Below that price, the federal tax saved is smaller than the value lost. Edward Jones Investments starts with the house, then asks whether waiting is affordable.

Here is the before picture (hypothetical, round numbers). Raj and Lan have a $2 million net worth: $1.4 million in chip company stock, Lan's startup shares worth $500,000 at the $25 tender price, and $100,000 in cash. Lan exercised 20,000 shares at $1 when fair value was also $1, so her basis is $20,000.

Year 3 (now): selling into the tender means $500,000 of proceeds minus $20,000 basis, a $480,000 gain. At an assumed 23.8% federal rate (20% long-term plus 3.8% net investment income tax, for illustration), tax is $480,000 x 0.238 = $114,240. She nets $385,760, which is $14,240 short of the $400,000 down payment.

Year 4: still no full exclusion on older-style stock. Year 5 and later: federal tax on the gain drops to $0 if the shares qualify and are still held. But the price, and whether any buyer exists, is unknown. Read the table by one assumption: the $25 price falls while the 23.8% rate stays fixed for the sale-now row.

At $15 a share, waiting costs $85,760 compared with selling now ($385,760 minus $300,000).

Now the after picture. They skip the tender and sell $400,000 of chip company RSU shares that vested more than a year ago, with only about $20,000 of gain. Tax is $20,000 x 0.238 = $4,760. Chip stock falls from $1.4 million to $1 million, and the house due date no longer depends on a private company's next liquidity event. Lan keeps her shares toward the 5-year mark.

Private shares can lose value or become impossible to sell, and any investment can lose money, including what you originally put in.

Selling into the tender now

Skipping the tender

Weigh the exclusion against the house due date

Holding saves federal tax, $114,240 in Lan's example, but it gives up liquidity and adds 2 more years of single-company private risk. Raj and Lan can accept that wait because their high-basis chip shares cover the down payment. A household whose only down-payment money is the startup stock should take the tender. A tax saving is worth nothing if the $400,000 isn't there on the closing date. Edward Jones Investments sets how much a portfolio can afford to lose from the spending plan, not from a risk questionnaire. Here the spending plan says the house money has to sit outside the private shares.

What can break QSBS status after you decide to hold?

Three kinds of events can end the exclusion or shrink it: company events like a cash sale, titling and paperwork errors, and a change in law or in your own health or job. A cash acquisition before the holding period ends simply makes the gain taxable.

The startup can also raise a down round or cancel future tenders. Some stock-for-stock deals carry QSBS status into the new shares, but the exclusion may be limited to the gain built up at the time of the swap.

Re-titling shares into a family LLC taxed as a partnership for 'asset protection' can end the exclusion for those shares, because the LLC did not acquire them at original issuance. On Lan's $480,000 gain that adds back $114,240 of federal tax at the assumed rate. Undoing it means a tax attorney reviewing whether the transfer can be reversed, and reversing it may not restore the status. A revocable trust where you are the grantor, or a gift to a family member, generally keeps the original holding period.

A serious illness or a layoff can force a sale before year 5, so keep 6 to 12 months of spending in cash outside the startup shares. Congress already changed the rules once for newer stock and could again. Recheck the rules each year you hold, instead of assuming today's version applies at sale.

Company events

The LLC titling mistake

Health, jobs and law

Raise the tender window at home first

In Raj and Lan's house, Lan raises it first, because the tender email lands in her old work inbox with a 20-business-day due date. Raj's first question is about the house, not the tax. Hold a 30-minute talk with 3 items on the table: the down payment due date, the $114,240 tax figure, and the lowest share price at which both are comfortable waiting ($19.29 in the example). Settle it while the offer is still open, so the deadline doesn't make the choice for you.

Bring your exercise records to Edward Jones Investments

Talk to Edward Jones Investments when a tender offer, acquisition rumor or job change puts a sale date within 2 years of your holding-period end. Bring the exercise confirmations, the company's written QSBS statement (or the email asking for it), and your next large spending due date. You can meet by phone or on a video call. We cover the fee openly when we first talk and put it in writing before any work begins. Related reading on the site covers stock option exercise strategy and how ISO exercise and AMT interact.