By: Dr. Tamara Patzer
In brief: A founder with a high valuation and little cash can still cross California’s top 1% income line the year the equity turns into money. Stock issued after July 4, 2025 can qualify for tiered exclusions at three, four and five years. This feature explains the timeline, its limits and the questions a New Orleans tax attorney says founders should settle early.
A founder can be worth a fortune on a term sheet and still wonder how to cover a down payment. That is how equity works. The day it turns into money, the same founder can land far above California’s income line for the top 1%, which a 2026 estimate sets at $987,325 of adjusted gross income1. Tax and estate attorney Todd M. Villarrubia, who practices in New Orleans and wrote Entrepreneurial B.E.A.S.T. Mode™, says the founders who do best are the ones who treated the calendar as part of the plan from the start.
How much income does it take to reach the top 1% in California?
About $987,325, in SmartAsset’s 2026 projection1. The figure moves 2022 IRS filing data forward to 2026 and describes filers rather than households1. By the same projection, Washington is at $903,303 and Texas at $817,1581.
For a founder paid mostly in equity, the line is a poor guide to ordinary years. Salary may sit far below it. The year of a sale, a tender offer or a secondary can sit far above it.
What changed for qualified small business stock?
For stock issued after July 4, 2025, Jones Day reports that a shareholder can exclude 50 percent of eligible gain after holding the stock three years, 75 percent after four and 100 percent after five2. The per-issuer gain cap rises from $10 million to $15 million, and the gross assets limit at issuance rises from $50 million to $75 million, with both amounts indexed for inflation starting in 20272. The expanded rules apply only to stock issued after that date2.
Those are the headline numbers. Whether a particular company’s stock qualifies depends on facts the source does not cover, including the type of business and the type of entity. A founder cannot assume the exclusion applies, and the assumption is exactly what a licensed attorney should test early.
Why does the clock start earlier than the exit?
Because the holding period runs from issuance, not from the day the founder starts thinking about a sale. Stock issued after July 4, 2025 has to be held three years to reach the first tier and five to reach the full exclusion2. A founder who gets stock now and receives an offer in eighteen months is on a different footing from one who waits.
Villarrubia’s book makes the general point about timing: “Advanced planning doesn’t begin at exit; it begins years before opportunity knocks.” He also ties it to structure. In his words, “Estate planning is more than just creating documents; it’s about strategically structuring ownership before opportunities arise.”
The same logic applies to ordinary gains. Long-term capital gains are taxed at 0, 15 or 20 percent, and an asset must be held more than one year to qualify3. The IRS lists a higher maximum rate of 28 percent for the taxable part of qualified small business stock3. Which rule governs a given sale is a question for a tax professional.
What else shows up in a sale year?
Investment income can carry a 3.8 percent Net Investment Income Tax once modified adjusted gross income passes $200,000 for single filers or $250,000 for joint filers4. For a founder whose income usually sits below that, a sale year can bring the surtax into play for the first time.
None of this is a reason to avoid a sale. It is a reason to model the year before the term sheet is signed, since some of the choices that shape the result cannot be made afterward.
What does the book say about the gap between paper and cash?
Villarrubia describes the problem in a single sentence: “It isn’t until a liquidity event that their wealth is fully realized; until then, it’s largely paper value.” A founder in a high-priced city may feel the gap daily, since the valuation does not pay the rent.
His response is not to rush a sale. It is to plan around the possibility of one: how the shares are held, who else owns them, what happens if a cofounder leaves and how the family would be affected. Those questions are easier to answer when no one is waiting on the answers.
What should a founder write down now?
A one-page timeline is enough to start:
- The date each block of stock was issued, and who holds it.
- Whether the company has tested its eligibility for any stock exclusion.
- The estimated income in a sale year, compared with the thresholds above.
- Who the founder’s advisers are, and whether the tax and legal advisers have met.
- What the founder wants the money to do, for the family and for the company.
Why do cofounders and family matter to the timeline?
Because equity is rarely held by one person. If a cofounder leaves, a spouse has an interest or a trust holds some of the shares, the plan has to account for each holder. A tax result that works for one shareholder may not work for another. Villarrubia’s point is that the questions of who owns what, and under what agreement, should be settled while everyone is still on good terms.
What should a founder do the day after hitting a milestone?
Write down the date and the facts. When were the shares issued? What was the company’s size at issuance? Who signed? Memory fades, and paperwork that was easy to find in the first year can be hard to find in the fifth. A short note in the company’s minute book, copied to the tax professional, costs nothing and spares trouble later.
Common questions
Does every founder qualify for the stock exclusion? No. Eligibility depends on facts about the company and the stock that this article does not cover.
What if my stock was issued before July 4, 2025? The expanded rules in the source apply only to stock issued after that date2. Earlier stock may fall under different rules, and a licensed professional can say which.
Is the California line the same as being wealthy? No. It is an income threshold for one year, and net worth is separate1.
Sources
- SmartAsset, Income Needed to Be in the Top 1% in Every State (2026)
- Jones Day, Qualified Small Business Stock Benefits Expanded in New Tax Bill (July 2025)
- Internal Revenue Service, Topic no. 409, Capital Gains and Losses
- Internal Revenue Service, Topic no. 559, Net Investment Income Tax
About the author. Dr. Tamara Patzer is a publisher and former newspaper editor. She was on the staff of The Charlotte Sun when it was named a 2005 Pulitzer Prize finalist for its Hurricane Charley coverage.
About the source. Todd M. Villarrubia is an attorney with an LL.M. in Taxation and a Juris Doctorate. He is an Accredited Estate Planner, a Board Certified Expert in Estate Planning and Administration, and a Fiduciary Investment Advisor Representative. He is the author of Entrepreneurial B.E.A.S.T. Mode™. Wealth Planning Law Group, 101 W. Robert E. Lee Blvd., Ste 404, New Orleans, LA 70124. Phone: 504-982-8207; email: todd@lawealthplan.com; website: https://lawealthplan.com/?utm_source=newsanchored&utm_medium=san-francisco-post&utm_campaign=top-1pct
Attorney advertising. Sponsored feature written on behalf of Todd M. Villarrubia. This article is general information, not legal or tax advice, and reading it does not create an attorney-client relationship. Results vary.
Disclaimer: Sponsored feature written on behalf of Todd M. Villarrubia. This article is general information, not legal or tax advice, and reading it does not create an attorney-client relationship. Results vary.
