Snowball Effects of QSBS Tax Cuts could Disincentivize Startup Employees

Startup Employees QSBS

The Build Back Better Act (BBBA) and the proposed amendment to QSBS are threatening the way current small businesses are operating today, and those who invest in these businesses are equally concerned. Among them are angel investors who fund a large percentage of small businesses as collective entities. Angel investors are now at risk of having their QSBS tax exemptions cut in half, and if the proposed amendments are passed, they might not pursue investing the way they have in the past. 

The proposed amendment, if adopted, would affect American taxpayers with an adjusted gross income (AGI) over $400k, cutting the previously allowable 100% QSBS tax exclusion down to only 50%. This severely drives down the incentive for Angel Investors to pour capital into high-risk startups. These economy-driving investors are not only concerned about how their current QSBS investments will play out, but are also considering if they would make such investments in the future.

QSBS Provides Life-Changing Path for Startup Employees

In a story shared by members of our coalition, one particular angel investor shared how his investment went beyond benefitting his personal business portfolio. He explains, as many of the startups he invests in do not succeed as expected, it is the winners that make investing in these businesses worthwhile, and it would not be possible without QSBS tax incentives. In his experience, it is the employees of these businesses whose lives were significantly changed for the better.  A startup success, at the hands of QSBS, can benefit the investor, the founder, and the employees. This story shares how employees, in particular, are grateful for the rewards allotted to them as a result of these successes.

An investor and a CEO had a previous connection with a failed business venture; however, the faith in this CEO did not stop. The investor went on to support him in a second venture. It was this opportunity that succeeded, and would not have been possible without QSBS to help offset the previous loss. This investor shares a unique perspective showcasing how the employees were the real winners in this story.

Although many investors and founders take risks, employees of many startup companies also take risks, often at the expense of foregoing pay and accepting compensation well below market-value paired with receiving little to no employee benefits they might find at larger, more established companies. Many of these employees share the passion of their companies’ founders. Meanwhile both, founder and employee, have hopes of being a part of a successful company with the potential to share its success at a later time. 

Entry-level employees who had started with no benefits and below-market salaries were given stock options. These stock options became valuable, and these once underpaid employees, with no benefits, had later been compensated in a way that was life-altering for them. Many of these employees, who were programmers, secretaries, bookkeepers, and call-center employees, received payouts worth more than $400k. The angel investor was especially happy for these employees, as he knew them personally and knew this opportunity would be significant. The CEO of the company witnessed how the QSBS tax program worked for his company at the beginning, and again at the end. The employees were grateful because QSBS helped preserve their “nest eggs” earned over many years. They were compensated in lieu of secure retirement plans and higher salaries they may have earned at a more established company. 

QSBS Drives the American Economy and Its Workers

The American Economy is driven by small businesses. Investors provide capital and are willing to take calculated risks in the passions of founders who have a dream and vision to start a new business. QSBS makes taking those risks possible. It not only promotes job creation, but changes the lives of the employees who work for these small businesses. 

The change in the QSBS tax treatment would have trickle-down effects if investors reduce the amount of capital they put into startups and choose “safer” investments. Angel investors argue it could have a huge impact on the economy at large, and the lives of middle-class employees who, in this story, were able to realize personal financial successes. 

The threat of QSBS tax exemptions being cut in half are sure to impact how investors and founders invest under these new proposed amendments. With little safeguards to protect their investments, they will be less inclined to venture into new business opportunities. The snowball effect of this reality would be felt at the employee level. With less capital being poured into innovative companies, employees may also pursue safer alternatives when it comes to job security and pay.  Investors and founders are not the only parties who will feel the impact of these proposed changes.

We Want to Hear From You 

If you are concerned about how the BBBA may impact your company’s eligibility for the 100% QSBS exclusion or you are an angel investor with your own story, we want to hear from you. Join us as we unite our voices to speak out against these proposed amendments.

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.