Business valuations are conducted on fair market value (FMV) basis, which means “the price at which property would change hands between a willing buyer and a willing seller, neither acting under compulsion to buy or to sell, both being able and willing to trade, both being well-informed about the property and the market for such property, and both having reasonable knowledge of relevant facts (Sections 20.2031-1(b) and 25.2512-1).”
The asset test for section 1202 QSBS is conducted on an ‘aggregate gross assets’ basis, not fair market value.
Startups raising financing rounds based on pre-money and post-money valuations will not affect the asset test for QSBS purposes. Those valuations are based on a FMV that investors are willing to pay for. Startups raising money only take into account what goes on the asset side of the balance sheet (e.g. property or cash).
For example, a startup is raising its Series B financing round at a pre-money valuation of $40 million and intends to raise $15 million for a post-money valuation of $55 million. As long as the company does not have over $35 million in other assets on its balance sheet, the $15 million in cash received from the financing round will not affect the gross asset test for QSBS purposes.
More on the “Gross Assets” Tests
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.
This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.
