What is qualified small business stock, and how does it reduce tax on a sale?

The rules are specific: the stock must be issued directly by a qualifying C-corporation, generally held for more than five years, and the corporation must meet certain size and business-activity requirements at the time the stock was issued.

The potential exclusion is substantial, often covering millions of dollars in gain per shareholder, which makes this one of the most powerful tools available to founders and early investors in the right kind of company.

The catch is timing. Qualification is often determined at the point the company is formed or the stock is issued, not when it's sold, which means this is a strategy that has to be considered early, well before an exit is anywhere in sight.