Why this matters for biotech start-ups
Raising capital for drug discovery often pushes early-stage biotech companies above the gross asset limit for qualifying for the U.S. federal income tax benefits associated with qualified small business stock (“QSBS”). The law commonly referred to as the One Big Beautiful Bill Act (the “OBBBA”), signed into law on July 4, 2025, lets founders and other investors greater access these tax savings—potentially reducing their tax bill by millions when the company is sold.
The applicable highlights are as follows:
| Pre-OBBBA | Post-OBBBA (effective for stock issued after July 4, 2025) |
| Issuer asset cap: $50 million | Issuer asset cap: $75 million (inflation-indexed) |
| Per-issuer gain exclusion cap: Greater of 10x basis or $10 million | Per-issuer gain exclusion cap: Greater of 10x basis or $15 million (inflation-indexed) |
| Holding period: 100% exclusion after 5 years | Holding period: 50% exclusion after 3 years; 75% after 4 years; 100% after 5 years |
For founders or investors in start-ups that require liquidity before year 5—whether via a big-pharma acquisition or a crossover-led secondary—the new 3- and 4-year tiers are especially helpful.
Refresher on QSBS
The QSBS exclusion under section 1202 of the Internal Revenue Code of 1986, as amended (the “Code”), allows founders and early investors to exclude some or all of the gain on the sale of QSBS held for at least five years in an eligible C-corporation that:
- Had gross assets below the statutory cap before and immediately after the stock was issued, and
- Uses at least 80% of its assets in an active business (R&D qualifies).
The biotech sector typically meets the “active business” test, and, due to the OBBBA’s higher asset ceiling, more Series A/B-stage companies will now qualify.
Case study #1: Same early exit, new law, different tax bill
Scenario: Dr. Jean Founder, Ph.D., invests $100,000 for seed shares in NewCo Bio (C-corp) after July 4, 2025. Four years later, Big Pharma offers $12 million for her stake. Assume her cost basis is the $100,000 and ignore state taxes.
| Pre-OBBBA | Post-OBBBA | |
| Holding period | 4 years (no QSBS break) | 4 years (75% exclusion) |
| Gain eligible for exclusion | $0 | 75 % × $11.9M = $8.925M |
| Taxable gain | $11.9M | $2.975M |
| Fed. CG + NIIT Tax[1] | $2.83M | $0.83M |
| Additional tax saved | – | ≈ $2.0M |
Dr. Founder is left with ~$11.1M net—a [22][2] % increase in after-tax proceeds—due solely to the 4-year 75% exclusion.
Case study #2: Longer term hold
Scenario: Same facts as above, except that she holds for five years and NewCo sells for $18 million:
| Pre-OBBBA | Post-OBBBA | |
| Exclusion cap hit | first $10M is tax-free | first $15M is tax-free |
| Taxable gain | $7.9M | $2.9M |
| Fed. tax | $1.90M | $0.69M |
| Additional tax saved | – | $1.19M |
The higher dollar cap narrows the taxable portion even for founders and investors who already planned a five-year hold.
Practical take-aways for biotech founders
- Confirm eligibility early: If your last priced round pushed assets over $50M but you are still under $75M, new shares (and possibly option exercises) can now qualify.
- Model shorter liquidity horizons: The 3- and 4-year tiers make earlier M&A or secondary offerings more attractive, especially for platforms whose value inflects quickly after initial clinical read-outs.
- Confirm the issuance date: Stock issued after July 4, 2025 benefits from the new rules; earlier issuances stay under the old regime—plan grants and option exercises accordingly.
- Watch the per-taxpayer cap: The dollar cap remains per taxpayer, per issuer. Spousal planning or trusts may allow holders to spread exposure if a sale could exceed $15M of gain.
- Remain a C-corp: Converting to an LLC taxable as a pass-through or electing to be taxable as an S-corp can revoke QSBS status; quantify the benefit before considering entity changes.
Looking ahead
Founders contemplating financing structures should document valuations and use-of-proceeds carefully and consult tax counsel.
Gibson Dunn’s Life Sciences and Tax teams are tracking the OBBBA roll-out closely and can help biotech companies structure financings and exits to maximize the new QSBS benefits.
[1] The capital gains tax rate applicable to gain that is not excluded with respect to a sale of QSBS that was acquired before July 4, 2025 is generally 23.8%. The capital gains tax rate applicable to gain that is not excluded with respect to a sale of QSBS that is acquired after July 4, 2025 and held for fewer than 3 years is 23.8%. The capital gains tax rate applicable to gain with respect to a sale of QSBS that is acquired after July 4, 2025 and that is not excluded by reason of the fact that it is held for at least 3 but fewer than 5 years is 28%.
[2] This is the percentage increase of the after OBBBA Net Proceeds over the pre-OBBBA Net Proceeds. Pre-OBBBA Net Proceeds equals gain ($11,900,000) minus pre-OBBBA tax bill ($2,832,200). After OBBBA Net Proceeds equals gain ($11,900,000) minus after OBBBA tax bill ($833,000).