The 83(b) Election For Startup Founders
If founders stock is issued subject to a vesting period, each founder should make a Section 83(b) election with the IRS within 30 days of purchasing the restricted stock. If a founder fails to make a 83(b) election, each vesting milestone will be a taxable event for the founder. “Income” will be calculated as the difference between the FMV of the portion of stock that vested and the original purchase price of the newly-vested portion.
Thus, failure to make an 83(b) election could leave the founder with a tax bill without experiencing a liquidity event.
The 83(b) election neutralizes this potential disastrous tax consequence, and the founder recognizes “income” upon the initial restricted stock purchase. This income is usually $0, as the initial restricted stock purchase price is usually made at FMV.
About the Author
Ryan Roberts is a startup lawyer and represents technology companies through all phases of the startup process, including incorporation, seed & venture financings, and exit transactions. Click here to learn more about his practice.
If the founders failed to file a 83(b) when forming the corporation, and the initial stock was a no par value, can they file an 83(b) prior to setting an updated present valuation based on the no par value?
What options do you have if the 83(b) was not filed up front?