QSBS recordkeeping for startups: keep the evidence before an exit

Section 1202 allows some holders of qualified small business stock to exclude part or all of the gain when they sell. Qualification depends on facts about the company and the shares at specific times, and the person who must prove it is the shareholder, often many years later. The rules were amended in 2025, so confirm which version applies to your shares' issue date.

Founders and employees rarely have the paperwork at an exit unless it was kept from the start.

Keep evidence that the company was a domestic C corporation when the stock was issued, and that it stayed one. Keep the issuance record showing the date, the number of shares, the price, and that the shares were acquired from the company in an original issuance. Keep records of the company's gross assets at and just after issuance, such as a balance sheet. Keep a description of the business, and evidence that it was an active business in a qualifying field.

Also keep records of how the shares were paid for, since stock issued for services or a contribution of property has its own considerations.

Certain actions can affect eligibility, such as redemptions of stock around the time of an issuance or changes to the entity type. Before the company repurchases shares or restructures, ask whether it affects qualified status.

Create one folder per holder: the stock purchase or option exercise agreement, the issue date, the 83(b) election if one was filed, the cap table entry, and a company certificate or letter confirming the facts. When a sale approaches, update it with the sale documents.

This is a field where the details decide the outcome. Have a tax advisor review the file before a financing, before a sale, and when the rules change.