# QSBS, the Safer, and the Liquidity Tradeoff | SURGE

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- Published at: 2026-03-04 12:03:25 UTC
- Updated at: 2026-03-04 20:59:22 UTC

## Author
Miguel Jaramillo

## Subject
SURGE

## Content
Why Compound Returns from Faster Liquidity Beat Deferred Capital Gains ExclusionsBy John Cowan, Founding Partner, Next Wave PartnersIf you are evaluating an investment in Surge Holdings through our Safer (Simple Agreement for Future Equity with Repurchase), you may be wondering about Qualified Small Business Stock treatment under IRC Section 1202. It is a reasonable question, and one we hear often from sophisticated investors and family offices. This article provides an honest, transparent answer.The short version: Surge is a Delaware C-Corporation and structurally qualifies for QSBS today. Our Safer instrument includes an explicit tax characterization clause referencing Section 1202. But the more important question is whether QSBS is the right framework for evaluating an investment in the Safer at all. We believe it is not, and we want to explain why.The Safer was designed to solve a fundamentally different problem than the one QSBS addresses. Section 1202 incentivizes long-term, illiquid investment in small companies by offering a capital gains exclusion at exit. The Safer eliminates the illiquidity problem directly, paying investors quarterly returns tied to actual company revenue, rather than asking them to wait years for a tax break that depends on a successful exit.What QSBS Actually RequiresSection 1202 of the Internal Revenue Code offers a powerful benefit: up to 100% exclusion of federal capital gains on the sale of qualifying stock. Following the One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, a new tiered structure applies to stock issued after that date. Investors can now access a 50% exclusion after three years, 75% after four years, and the full 100% exclusion after five years. The per-issuer gain cap was raised from $10 million to $15 million, and the gross asset threshold increased from $50 million to $75 million.These are meaningful enhancements. But the benefit is inseparable from its constraints. To qualify, the investor must hold actual stock, not a convertible instrument, not a SAFE, and not a revenue-sharing agreement, for the applicable holding period. The stock must be issued by a domestic C-Corporation with gross assets below the threshold, operating in a qualified trade or business, and acquired at original issuance.For a SAFE investor in a traditional venture-backed company, this means waiting for a priced financing round to trigger conversion into equity, then holding that equity for three to five additional years, then hoping for a liquidity event that generates taxable gain. During that entire period, the investor's capital is locked, illiquid, and generating zero current income. The IRS has not issued definitive guidance on whether SAFEs themselves constitute "stock" for Section 1202 purposes, meaning the holding period may not even begin until conversion. In practice, very few SAFE investors actually achieve QSBS treatment.The Safer Is Designed to Solve a Different ProblemThe Safer's entire architecture rejects the premise that investors should wait years for a single terminal liquidity event to realize returns. Instead, it generates returns through quarterly repurchase payments tied to the company's gross revenue, beginning as soon as revenue flows after the honeymoon period. In a successful deployment, the investor may receive their full target return (200 to 250% of the purchase amount) through repurchase payments alone, without ever needing conversion into equity.The Safer converts to equity only at a terminal liquidity transaction: an acquisition, an IPO, or a dissolution. This means the practical holding period for any converted shares is effectively zero. The investor receives shares at the moment of the transaction and immediately exchanges them. There is no window to accumulate a multi-year holding period on the converted equity. The QSBS clock never meaningfully starts.This is not a flaw in the Safer's design. It is the point. The Safer was built to return capital through cash flows, not through equity appreciation subject to capital gains treatment. Asking whether it qualifies for QSBS is asking whether a cash flow instrument should be treated as stock for tax purposes. The answer may be technically arguable, but the practical reality is that QSBS was designed for a fundamentally different type of investment.The Accounting Confirms the Economic RealityThis is not just an investment philosophy argument. It is confirmed by the Safer's formal accounting treatment.Next Wave Partners engaged Armanino LLP, a top-25 U.S. public accounting firm, to produce a comprehensive accounting treatment memorandum for the Safer instrument. The analysis walked through the full ASC 480 (Distinguishing Liabilities from Equity) and ASC 815 (Derivatives and Hedging) framework. The conclusions are clear.The Safer is classified as a freestanding derivative liability measured at fair value, with changes in fair value recognized in earnings. It is not classified as equity. The accounting memo specifically states that the Safer "does not provide for conversion into equity shares" and that notional equity values calculated at a liquidity event "are always to be paid to the Investor only in cash." The Safer fails the indexation test under ASC 815-40 because its settlement amount incorporates variables beyond those used in pricing a standard equity option, specifically the revenue-based repurchase mechanics and the Target Return. Quarterly repurchase payments reduce the derivative liability on the balance sheet and are recognized as an expense. They are not dividends and they are not return of equity.The Surge Safer does include a tax characterization clause (Section 5(7)) stating that the parties intend the instrument to be treated as common stock for purposes of Section 1202. Tax and GAAP accounting do not always align, and contractual intent carries weight in tax analysis. But the divergence is real, and we believe the right approach is transparency. An instrument classified as a derivative liability on the issuer's balance sheet, settled entirely in cash, with no equity shares delivered to the investor in the ordinary course, is a harder case for QSBS treatment than a standard SAFE that at least converts into actual shares at a priced round.The Math: Compound Liquidity vs. Deferred Tax SavingsThe investor who asks "What about QSBS?" is implicitly comparing two economic outcomes. It is worth making that comparison explicit.Consider a $100,000 investment. The maximum QSBS benefit at a 23.8% combined federal rate (20% long-term capital gains plus 3.8% net investment income tax) on a 10x return is approximately $214,200 in federal tax savings on $900,000 of gain. That is meaningful, if it happens.But that $100,000 was locked up for eight to ten years. Had the Safer returned 2.5x over four years and the investor redeployed $250,000 into another income-producing asset at even modest returns, the compound value of having liquid capital years earlier frequently exceeds the QSBS tax savings. This is especially true when accounting for the probability-weighted reality that most startups never achieve a 10x exit.QSBS is a tax benefit on a gain that may never materialize. Safer repurchase payments are actual dollars in the investor's account every quarter. The time value of real liquidity versus deferred hypothetical tax savings is the central economic question.The $75 Million Asset Cap: A Structural Problem for InfrastructureThere is a deeper structural issue worth understanding. For stock to qualify as QSBS, the issuing corporation's aggregate gross assets (cash plus the adjusted basis of all property) must not exceed $75 million at the time of issuance and immediately after. This threshold resets with every stock issuance. If a company raises a large round that pushes gross assets above $75 million, any stock issued in or after that round loses QSBS eligibility permanently.This creates a genuinely perverse incentive for infrastructure companies. Surge's business model requires deploying physical infrastructure: edge compute nodes, sensors, network equipment, and rights-of-way across thousands of locations. Each deployment adds to the company's asset base. The entire value proposition is building real, tangible infrastructure at scale.An investor optimizing for QSBS eligibility would prefer that Surge not grow too fast, not deploy too much infrastructure, and not raise too much capital, because crossing $75 million in gross assets permanently disqualifies future stock issuances. This is exactly backwards from what makes the company valuable.A venture-backed SaaS company with minimal physical assets might comfortably sit below $75 million for years. An infrastructure company deploying 10,000 or more intelligent nodes across a metropolitan region will not. The $75 million cap reveals a structural bias in the tax code toward asset-light, high-margin software businesses, the same companies that dominate traditional VC portfolios. Infrastructure companies, manufacturing companies, and hardware companies are penalized for doing exactly what the economy needs: building real things.For a Public Benefit Corporation like Surge, whose stated purpose includes building shared intelligent infrastructure for public benefit, the idea of deliberately constraining growth to preserve tax treatment for investors is antithetical to the mission. The Safer aligns incentives correctly: investors get paid as the company grows and deploys, not as a reward for the company staying artificially small.Where Surge Stands TodayFor completeness, here is Surge's current QSBS eligibility status.Surge Holdings Inc. was incorporated in Delaware on July 23, 2024 as a C-Corporation and transitioned to Public Benefit Corporation status in October 2025. The PBC designation does not affect C-Corporation tax status or QSBS eligibility. The company's gross assets are well below the $75 million threshold. Its core business, deploying, operating, and maintaining multi-tenant edge computing and connected sensor infrastructure, is a qualified trade or business under Section 1202 (which excludes certain service industries like financial services, consulting, and hospitality, but not infrastructure technology).Structurally, the company checks every box. The Safer includes a Section 5(7) tax characterization clause stating the parties' intent to treat the instrument as common stock for Section 1202 purposes. But as discussed above, the Armanino accounting analysis classifies the instrument as a derivative liability settled in cash, and the Safer converts to equity only at a terminal event, leaving no practical window for a holding period.The honest position: Surge qualifies for QSBS. The Safer includes the right language. But we are not going to market the Safer on the basis of a tax benefit that the instrument's own accounting treatment classifies differently, that depends on the company constraining its growth, and that requires a holding period the instrument's design does not accommodate.What We Are Selling InsteadThe Safer's value proposition does not depend on QSBS. It does not depend on a five-year hold. It does not depend on a 10x exit. It depends on Surge generating revenue from real infrastructure deployments and sharing that revenue with investors every quarter.The Safer pays investors as the company grows. It provides liquidity without requiring an exit event. It aligns returns with actual company performance rather than with hypothetical future valuations. And it allows investors to recycle capital into new opportunities rather than locking it up for a decade waiting for a tax benefit.For investors who want QSBS treatment, the path is straightforward: invest directly in Surge equity (common or preferred stock) and hold for the applicable period. That option exists. But for investors who want current income, compound returns, and the ability to redeploy capital, the Safer was built for you.Appendix: OBBBA Changes to Section 1202For reference, here is a summary of the key QSBS changes enacted by the One Big Beautiful Bill Act, effective for stock issued after July 4, 2025.State conformity varies. Most states, including North Carolina, follow federal QSBS treatment. California, Alabama, Mississippi, and Pennsylvania do not conform and impose full state capital gains tax regardless. New Jersey adopted conformity effective January 1, 2026.This article is for informational purposes only and does not constitute legal, tax, or investment advice. QSBS eligibility is fact-specific, and investors should consult their own tax advisors regarding their individual circumstances. The accounting treatment analysis referenced in this article was produced in collaboration with Armanino LLP. Surge Holdings Inc. is a Delaware Public Benefit Corporation. Securities offered through applicable exemptions.© 2026 Surge Holdings Inc., PBC. All rights reserved.