Early-Stage Valuation and QSBS

In a recent article about the state of pre-seed valuation, Brett Calhoun of ScaleVC discusses the challenges of valuing pre-seed startups and how to avoid overvaluation. Calhoun notes that pre-seed startups are often overvalued because they have little to no track record and are therefore difficult to assess. Additionally, Calhoun warns that pre-seed investors may be more likely to make emotional decisions based on their excitement for the company.

The article provides a number of tips for entrepreneurs, including:

  • Do your research: Before you start fundraising, make sure you have a good understanding of your industry, your competition, and your target market. This will help you to set a realistic valuation for your company.
  • Be prepared to negotiate: Don’t be afraid to negotiate with investors on valuation. Remember, you are the one selling your company, so you have the power to set the price.
  • Get multiple offers: Don’t just take the first offer you get. Get multiple offers from different investors so you can compare them and get the best possible deal.

While pre-seed valuation is a complex issue, an entrepreneur can take steps to increase their chances of getting a fair valuation for their company, and the approach taken by Scale, which takes into account:

  • The team’s experience starting and leading companies
  • Technical / development capabilities
  • Domain experience

Connections between Valuation and QSBS

There are multiple areas where valuation comes into play with QSBS, such as:

  • The Active Business Requirements, which need to be satisfied for “substantially all” of a shareholder’s holding period, are based on the fair value of the company’s assets.
  • If the company redeemed stock, whether or not those redemptions are considered to be “significant” and potentially impact the ability for other shares to qualify as QSBS depends on the portion of the value of total equity redeemed.
  • If a company converts from an LLC to a C-corp, the assets contributed to the C-corp are measured at fair value for QSBS purposes. It is also the case that during such a conversion, the shareholders generally receive a step-up in their basis to the fair value, which can impact the ultimate QSBS exclusion amount (i.e. greater of $10M or 10x basis).

Given the multiple ways valuation impacts QSBS, it is important that companies monitor their valuation over time. The CapGains platform helps companies and shareholders stay on top of the QSBS requirements – get your company started on your QSBS journey here today!

This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.

About QSBS Expert

QSBS Expert was founded by a group of entrepreneurs, investors, accountants and lawyers who came together when trying to navigate a QSBS situation of their own. We quickly realized that the regulations left a lot of open questions and the publicly available information was confusing to sift through…so we thought that others may also benefit from having a “go to” resource for all things QSBS.