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What is an 83(b) election?

February 15, 2008

Failing to make a timely 83(b) election with the IRS is something that could lead to disastrous tax consequences for a startup company founder or employee.

Founders typically purchase stock pursuant to restricted stock purchase agreements that allow the company to repurchase “unvested” stock upon termination of employment. Similarly, employees may “early” exercise options subject to the company’s ability to repurchase “unvested” shares upon termination of employment.

Under Section 83 of the Internal Revenue Code, the founder/employee would not recognize income (the difference between fair market value and the price paid) until the stock vests. However, if a founder/employee makes a voluntary Section 83(b) election, the founder/employee recognizes “income” upon the purchase of the stock.

Typically, the purchase price for the stock and the fair market value are the same. Therefore, if an 83(b) election is made, there is no income recognized. Thus, a founder/employee should almost always make an 83(b) election. The benefits of an 83(b) election generally are starting the one year capital gain holding period and freezing ordinary income (or alternative minimum tax) recognition to the purchase date.

If the founder/employee does not make the 83(b) election, then he or she may have income at the stock “vests.” The income will be substantial if the value of the shares increases substantially over time.

For example, assume that a founder purchases stock for $0.01 per share (fair market value is $0.01) and the stock is subject to four year vesting with a one year cliff. The founder does not make an 83(b) election. At the end of the one year cliff, if the stock is worth $1.00/share, then the founder would recognize $0.99/share of income. As the remaining stock vests each month, the founder would recognize income equal to the difference between the fair market value and $0.01/share. In addition, the company is required to pay the employer’s share of FICA tax on the income and to withhold federal, state and local income tax.

If the founder had made an 83(b) election, the founder would not recognize any income as the stock vests, as the 83(b) election accelerates the timing of recognition of income to the purchase date.

In order for an 83(b) election to be effective, the individual must file the election with the IRS prior to the date of the stock purchase or within 30 days after the purchase date. There are no exceptions to this timely filing rule. The last possible day for filing is calculated by counting every day (including Saturdays, Sundays and holidays) starting with the next day after the date on which the stock is purchased. For example, if the stock is purchased on May 16, the last possible day for filing is June 15. The official postmark date of mailing is deemed to be the date of filing. The election should be filed by mailing a signed election form by certified mail, return receipt requested to the IRS Service Center where the individual files his or her tax returns. If the election is mailed after the 27th day, the individual should hand deliver the letter to the post office to obtain an official date-stamp on the certified mail receipt. A copy of the election should be provided to the company, and another copy should be attached to taxpayer’s federal income tax return for the year in which the property is acquired.

Written by Yokum · Filed Under Founders 

Comments

  • Ojjuan
    Here is my scenario...

    I have formed a new business along with one business partner.  Back in Sept 2011, we registered as a Delaware corporation with an S-corp election (form 2553).  In the process of filing, we specified an initial number of issued shares (1000), and in the S-corp election, we had to specify either a % ownership or a number of shared owned by the company founders.  Without much thought, we simply stated that we each had 50% ownership.  We did NOT sign any shareholder agreement, issue any restricted shares or actually purchase shares of the company. 

    Fast forward to today.  We want to add a third (equal) partner and sign a shareholder agreement between the three founders, then file an 83(b) election.  We will each be investing in the company and purchasing restricted shares.  Since there has been no purchase of shares subject to substantial risk of forfeiture to this point, I don't believe we are under any time restriction for an 83(b) election.  But, does the act of filing the S-corp election and defining 50% ownership to the two original founders mean that we need to rewind what we have already done?  Say, sell back our shares to the company then reissue restricted shares to 3 founders?

    Thanks!
  • Sspar
    I rec'd some restricted units in an operating private company (LLC), but have no idea of the FMV. The company does not provide guidance. It also is not issuing any 1099 or taking a tax deduction for the value. Other classes of stock have preference and my stock is worth $0 even at reasonable ale prices (i.e. only participates at high valuation liquidity event). Is it reasonable for me to assume minimal value on my 83(b) election?
  • Miguel de Vega
    Extremely interesting post! 

    I wonder if it applies to our situation. We are nonresident aliens who just incorporated in Delaware, and who are about to issue founder stock subject to vesting. I think (but I am not sure) that we (as founders) will NOT have to pay income tax in the U.S., but in our residence countries. In that case, it would not be necessary to make an 83(b) election, since we wouldn't even have to get an Individual Taxpayer Identificaiton Number (ITIN). Does this make any sense to you?
  • If you are looking for more information on 83(b) elections, I recently published a post on the topic:

    http://wp.me/p1ivVG-ao

    Thank you,
    Doug
  • Marko
    if you elected for 83b when you started the company and you raise money afterwards and have a new vesting schedule etc, do you need to do the 83b process again, or since you already own the shares it's not necessary?
  • I read this in Do More Faster for the first time, and I'm glad because I would have never known otherwise.
  • Best Taxmen
    What if the election is not attach to the tax return. Can it be attached to an amended return? Ron
  • MarMar
    if a person elects an 83b will the employee paid payroll tax still be taken at the time of original vesting or is the whole transaction deferred?
  • Roger
    Yokum, in an extreme case, if I all my restricted stock purchased vested (four year passed), I did not have any knowledge of 83b election at all, means did not file, did not pay the tax between purchase price and FMV, even did not pay tax for the vested parts in past four years. Now, the part of stock were sold at a significant gain. What is the exactly the fatal tax consequence? pay tax at ordinary income rate on vested part each year, penalty and accumulated interests on each years gain, etc. Is that right? What the tax rate will be on the gain between the first year's value (first 1/4 vested part) and today's sell value? For example, 0.01 was the initial FMV and purchase price, 1.01 was the value of one year later, and today the sold price is 10. there are $9 gain for this 3 year's holding. What is the tax rate on this $9 gain, long term capital gain or ordinary income rate? Thanks.
  • foster
    Is it possible to undo a filed 83b? I filed one having been told each share was worth 1 cent. Our company has just had an independent valuation done and the shares have been valued at 20 times that. I no longer want to pay all the taxes upfront. Thanks.
  • Erin
    This is a very informative post. However I haven't been able to find an answer to my situation: I am not American, and I live/work outside the US, but have received shares in a US-based startup company that I am working for. I have been told by the company to file the 83(b) election form. They seem to think that I need to. But do I really? It seems weird filing a form to the IRS when I have no US address and no taxpayer number.
  • Gary
    Yokum - we formed a new LLC and the founders have units that vest as follows: 1/3 immediately, 1/3 upon the closing of the seed financing and 1/3 upon closing of the Series A financing, provided that the founder continues to be "substantially involved" with the venture at each milestone. Should we seek 83b treatment for the 2nd and 3rd traunches of equity as they are subject to forfeiture, based on company performance and tied to "substantial involvement"? Thanks.
  • Luvmykids
    My husband wants me to sign the spousal consent part of the restricted stock purchase agreement. I don't understand what exactly I'm signing away. What happens if we divorce? Does that mean he has complete control of the shares he bough and I waive my rights to 1/2 the shares? we live in a community property state and I'm a stay-at-home-mom. help.
  • Pete
    This post has been very helpful, but I have a question that I don't believe has been answered. I just joined a startup as a founding member, but on 10/1/2010 I signed an operating agreement that is effective 1/1/2010 (9 months prior). Included in the operating agreement is each founding member's "Member Interest" (percent ownership), but we will not receive certificates until January 2011. The Member Interest was not purchased with cash, it was earned through unpaid hours worked for the company (sweat equity).

    Can I file an 83(b) election in this situation?
  • @Pete - it doesn't seem like the interests are subject to vesting (risk of forfeiture), so no 83(b) election is required. However, one can't tell without reviewing all of the documents.
  • Pete
    Thank you for your reply, Yokum. There is vesting for the Member Interest. Here is some supporting text from the company's operating agreement: "Membership Interests shall vest over a 3-year vesting period commencing from the date the Membership Interest is issued with 1/3 of such interest being vested after one year and the balance vesting quarterly over the next two years on a pro rata basis. In the event the holder of Membership Interests is not or ceases to be an employee or independent contractor, voluntarily or involuntarily, all Membership Interests which have not vested on or before the date of such determination shall immediately terminate and have no value whatsoever. Any Membership Interests which have vested on the date of such determination may be repurchased at the option of the Company at any time after the date of such determination..."

    Based on the above, should I file the 83(b) election? Also, when is the Membership Interest legally "issued" in my situation? Is it 1/1/10, the effective date of the Operating Agreement; 10/1/10, the date I signed the Agreement; or sometime in January 2011 when I receive a physical certificate? Thanks again in advance.
  • @Pete - you should consult with an attorney with regard to your specific facts. I would file an 83(b). I suspect that the 30 days would have started from 10/1/10, although there is some argument that perhaps the interest was granted on 1/1/10, then later subject to vesting on 10/1/10. Hard to tell without all of the facts.
  • cindy
    Great post!

    I have a question: I mailed the 83(b) within 30 days by certified mail, with a self-addressed stamped envelope. I checked USPS website with the tracking number and it showed that it was delivered. But three months passed and I haven't got the acknowledgement receipt from IRS. Is there a problem? How can I check if the IRS got my form on file? Is the certified mail record good enough?
  • Guest
    Can you clarify the requirement that 83(b) only applies to property transferred in connection with the performance of services? Does this apply only to employees/consultants, or do founders need to document the transaction to reflect performance of services as consideration for the purchase of stock? Thanks.
  • @Guest - stock subject to vesting is typically structured as a repurchase right that lapse based on continued services. Founder stock vesting is typically based on continued services. Don't understand the question.
  • I assume this is only for C-corps, right? There is no 83b election in LLCs. If I convert to the C-corp then I can make that election. Does that start the clock ticking all over again cap gains on my stock?
  • Excellent post!

    I'm curious... is there a Canadian equivalent of an 83b election? Let's say an employee in Canada has stock for a US company, would they just file the US 83b election or would they need to file something else in Canada as well?
  • @Rafael - don't know.
  • Guest
    I have to file an 83b election form/letter. I understand that I should fill it out, etc. Should my spouse fill out a separate 83b election form/letter and turn it in separately to the IRS? I have been reading that the spouse needs sign or file as well.
  • Beyond the founder situation, it's important for employees to know that when they exercise options that turn into restricted stock and make the Section 83(b) election, any taxes paid are not recovered if the shares never vest. Also not all employee stock options in pre-IPO companies are structured this way. In most grants, the options need to vest first before they can be exercised. These options result in stock that does not need to vest first and thus no 83(b) election.

    For more on these type of early exercise stock options, see the Pre-IPO section on www.myStockOptions.com. Section 83(b) is also discussed in the restricted stock part of that site.
  • Sjforest
    I am working for a start up and am going to receive a % of ownership in lieu of a salary for the first year. Do I need to make this election?
  • Greg
    I filed my 83b election a few days ago, but I did not mail it certified mail. Can/should I mail another election certified to ensure the IRS receives it?
  • @Greg - I might if you are still within the 30 day period and you did not include an extra copy with a request to return a file stamped copy in a self-addressed stamped envelope.
  • BRDixon
    I have an employee who made an 83b election and we are paying her dividends.

    The restricted stock vests over a three year period.

    Should I also issue her a stock certificate with a specific ledger stating the vesting period.
  • Richard Braithwaite
    Let's assume I do the 83(b) election this month when I form the C-corp.
    If, in 6 months, the company brings in an additional "founding partner," will it be necessary for the new co-founder to do their own 83(b) election?

  • So, about 6 months ago, I joined a startup and sent in my vesting schedule to the IRS. The 83(b) was mailed within a few weeks.

    4 months go by and I decide, for the heck of it, to call the IRS and make sure they have the document on file. 5 IRS agents and 54 minutes later... I finally get a hold of someone who even knows what a 83(b) is. They proceed to tell me that they don't keep that on file. She suggested that I mail a copy in with my personal return.

    If they don't keep it on file and it's not a part of my personal tax record... why are we even sending these in? Do people really have problems when they fail to send in a form that the IRS doesn't appear to even track?
  • gedleb
    What if one of the partners units are not restricted (but the others are)? Can the partner with unrestricted units also file an 83 B ?
  • hopenottoolate
    Question:

    I was awarded the Restricted Stock Option last year (Jan 2009) but didn't take any action. Now if I purchase the stocks, can I still make the 83(b) election? Or this can only be done within 30 days of awarding of the options?

    Thanks
  • @hope - you can make an 83(b) within 30 days of the purchase of the stock (i.e. early exercise of the option) if the shares are subject to a repurchase option.
  • leo_wang
    Yokum, thanks so much for your post! I made the selection middle of last year but forgot whether I mailed it to IRS or not. Is there a way to find this out? Can I attach a copy with this year's return to fix the potential problem of not mailing?
  • Guest
    Hi Yokum,

    I filed an 83(b) election within 30 days at the Fresno, CA's IRS Service Center although, as a non-resident, I need to file my 1040-NR at the Austin, TX's Center. Is there anything I can do about it?

    Thanks!
  • @Guest - you should ask a tax preparer.
  • sheron74
    Hi Yokum,

    Thank you for your great effort to maintain this site which is extremely helpful.

    According to your posts, can I say employees who early exercise ISOs and file 83(b) election will be subject to AMT report, and income tax report at time he sells the shares acquired? If employee chooses not to early exercise ISO, my understanding is he does not need to report income tax at time of exercise, but need to report income tax at time he sells the shares.

    If this is true, it seems early exercise of ISO with 83(b) election will not benefit employees in most of cases except it starts accruing time period earlier for long-time investment purpose. Plus, there is risk of double tax.

    I am green in this area, please correct me if I am wrong

  • @sheron - please check with your own advisors and read the disclaimers. If there is no "spread" (difference between exercise price and fair market value) at the time of exerise of an ISO, then there will be no AMT preference. Please see the following post for an explanation of the differences between exercise of an ISO and NSO. Generally speaking, a person will be better off with an NSO if he/she will exercise when there is no spread. http://www.startupcompanylawye...
  • Darryl G
    My situation seems typical but not covered here/in comments.

    I'm not a founder in the startup I am working for but I was issued employee options. I'm about to leave the company having already worked past my 1 year cliff - and so essentially I will have to exercise the options within 30 days of my last day.

    (I didn't elect to vest early but just signed my options agreement - which seems common among regular employees. Maybe that was the wrong decision?)

    Given where I am now, can you tell me where I stand with regards to 83b election? Can I still make the election when I exercise my options or am I too late?

    Many thanks
  • @Darryl - please check with your own advisors and read the disclaimers. If you are exercising fully-vested stock and there is no right of repurchase, then there is no need to file an 83(b) election.
  • Darryl G
    If there is no need to file an 83(b)... does that mean there is no way to avoid the tax created?

    Also, given the above when I start at the next startup I am about to join (as an employee), would I be in a better situation if I elected to exercise my options early and submit an 83(b)?

    Thanks for this great resource,
  • @Darryl - Tax on exercise of an option depends on whether it was an NSO or an ISO -- not whether you file an 83(b), which affects the timing of the measurement of tax. Early exercising an option may make sense if the aggregate exercise price is low.
  • janebouffard
    My husband filed a 83(b) with our year 2000 taxes after purchasing $15,000 worth of common stock in his startup (there were lots of preferred stocks too). The company sold in 2009 for peanuts and no common shareholders got anything. I am assuming we can take a 3,000 capital gain loss for the next 5 years. Is that correct? Also I have no paperwork yet. What will I need?
  • @Jane - please consult with a tax advisor. You will need some documentation from the company that the common stock was rendered worthless.
  • Chad
    What if I e-File? How do I attach the form?
  • wktaylor66
    I sold my single member LLC to Company A (which is private, closely-held and incorporated), in exchange for an adjustable promissory note, shares of restricted stock (not founders shares) AND an employment agreement.

    Per the buy-sell agreement, the shares I received are subject to a vesting schedule AND substantial risk of forfeiture for certain circumstances which are concurrently covered under my employment agreement with Company A.

    I received shares in exchange for the sale of the assets of my business, not necessarily for services rendered - although I have previously rendered services to Company A and I am currently rendering services to Company A on an ongoing basis, per my employment agreement.

    I filed the Section 83b election via certified mail within 30 days of signing the agreement and claimed a value of $____ which I calculated based on the shares I received multiplied by the recent accounting valuation.

    After reading through the posts, I'm wondering if I could have assigned a value of $0 to my shares since I did not pay for my shares. If I could have/should have assigned a value of $0, can I amend my return?

    I've been told that given my unique circumstances, that I could claim the value of the shares received as LTCG to the extent that the value received exceeds my cost basis. I could subsequently report the future sale of my restricted shares as a LTCG based on the difference between the original value of the shares received and the sales price.

    I'm sure I need to consult with a tax advisor and/or an attorney but I would be grateful for your opinion on the matter.

    Regards,

    KT
  • @KT - I punt to tax advisors.
  • suebe71
    What if I am given stock (that is vested immediately) and there is no market yet (product is still in R&D) for the stock and the company net worth is minimum? Does my income relate to the book value per share I receive? ie $1.00 per share book value @ 4,000 shares...$4,000 income to declare.
  • @suebe71 - if you receive stock as consideration for services, you should report the FMV of the stock as income. Please check with your own tax advisors and read the disclaimers.
  • ramsj
    great post, are the filing timing requirements (i.e., must be postmarked by the end of the 30 days) in the regs for 83(b) or somewhere else?
  • @ramsj - it's in the regs.
  • sterlingtax
    What if you are not sure if the stock is restricted or there is a substantial risk of forefeiture,, should you make the Section 83(b) anyway?

    What would the penalty be if , down the road, it is found, that Section 83(b) was not applicable?
  • @Sterlingtax - Seems kind of silly if you don't know whether the stock is subject to forfeiture or not. The recipient of the stock either signed or didn't sign a document that put a repurchase right on the stock. I suspect that there is no particular penalty in filing an 83(b) in a situation where an 83(b) could not have been filed. Please read the disclaimers and discuss with your own tax advisors.
  • ScottJab
    Hi Yokum - Great post!

    We are thinking of issuing Founders shares to an LLC that is jointly owned by the Founders (rather than to us in our individual capacities). Are there any issues/problems with subjecting restricted stock to vesting when that stock is held by an entity, rather than the Founders themselves? I assume the entity will need to file an 83(b) as well.

    thanks!
  • scottjab
    HI Yokum - Great post!

    If Founders' Common shares that are subject to vesting are issued to an LLC that is 50% controlled by each Founder (rather than to the Founders directly), should an 83(b) be filed as well? Taking a step back, is it OK to subject these founders shares that are held by the LLC to vesting?

    thanks!
  • @Scott - It's okay to to subject shares held by the LLC to vesting. I suspect that the LLC can/should make an 83(b) filing. Please read the disclaimers and consult with your own tax advisors.
  • Does the service provider who is issued Restricted Stock (with repurchase rights) have to pay anything for the stock? Can the original founder pay for the Restricted Stock and give the stock at no cost to the other founders?
  • @Ted - If the service provider doesn't pay FMV for the stock, then the service provider would be taxed on the value of stock received. Founders can gift stock to other founders, but subject to gift tax rules.
  • Joe Smeagle
    I received stock options. Then I purchased those options and filed a 83b election. The stock was converted to a marketable stock when the company was purchased by a public company. I sold some of the stock this year. The basis for the stock is the price I purchased it for? The 83b did what?
  • @Joe - please read the article again. If the options were early exercised, then the 83(b) election avoided you being taxed as the shares vest. Your basis in the stock is what you paid for it. Please read the disclaimers and consult with your own tax advisors.
  • Ben
    Great site.
    Can 83b elections be used with an LLC or are they solely for C corps?
  • @Ben - yes, they can be used for LLCs. Please check with your own tax advisors.
  • CJ
    What if you filed the election within 30 days but forgot to attach a copy to your return?
  • @CJ - you should ask your tax preparer. I would guess that a lot of people forget to file 83(b)s with their tax return.
  • ngk
    Thanks for this really useful post and responses! I have slightly different situation... I'm a founder, but waiting for authorization to work legally. in the meantime other founders incorporate and sign the share and vesting agreements, and I'm 'granted' founder shares as well. Since my share/vesting agreement is conditional to being an employee, would my 30 day window start from my join date, or would it be the date the general share agreement was signed? Hope you can respond, thanks!
  • rpatel76
    The 30 day window starts from the date you received the shares, and this date should definitely be in records. If you feel doubt that you will be able to complete it in this time, I would strongly suggest working with a tax preparer or (cheaper route) going through services like 83belection.com that will do it for you in just a matter of days.
  • @ngk - 30 days starts from when shares are issued, meaning the date an agreement is signed and check received by the company.
  • Ed
    What if the Stock Certificate was never physically issued? Agreement signed, check cashed, but no stock certificate, does that still trigger the 30 day period?
  • @Ed - Stock is issued when agt signed and check delivered. Physical delivery of certificate doesn't matter.
  • simon_button
    Hi Yokum, great post. I understand that an 83b is required when restricted stock has substantial risk of forfeiture. Assuming a startup has restricted stock, but the restrictions are based on only two aspects, 1) being death of founder, and 2) being breach of confidentiality and non-competition, then would this be considered a "substantial risk of forfeiture"?
  • @simon - you'll have to engage someone to research the question. I would guess that it probably isn't a substantial risk of forfeiture, but I'd probably file an 83(b) anyway.
  • smythe
    Yokum,

    Procedural question on 83(b) form...

    Is line 6 of 83b election form supposed to be the per share price at incorporation whatever it is established? (e.g. $.0001)?

    Is line 7 of 83b election form supposed to be the total cost of shares (i.e. $.0001 x # of shares) (e.g. $565)?

    Thanks...
  • @smythe

    line 6 - aggregate fair market value of the shares

    line 7 - aggregate purchase price of the shares

    Line 6 and line 7 should be the same number (except for unusual circumstances)
  • Adam Smith
    Excellent post. I do have a different but related question. I'm the co-founder of a startup. The co-founders' equity stake was arranged as a straightforward common stock purchase without a vesting clause, at a price of $0.0001 per share. Because there has been no vesting, my understanding is that 83(b) doesn't apply. However, within a month of the purchase, we raised our first round of serious funding from angel investors at a price of $0.50 per share. My question is: When do the co-founders start owing taxes on the $0.4999 per share of unrealized gains? Hopefully, these gains are treated as ordinary capital gains and the co-founders won't owe anything until the date they sell their shares.

    Another detail that might be relevant is that none of the cofounders were employees at the time when these contracts were executed happened. They were only on the board of directors.
  • @Adam - No need to file an 83(b). No tax event for founders upon angel financing. Tax event occurs when the shares are sold. Please check with your own advisers and read the disclaimers.
  • Lee_Andrew
    Yokum, I have read the disclaimers and i am in the process of getting a tax advisor. BTW, any tax advisor that you would recommend in the bay area?

    Last year when my company was started the 4 founders signed purchase agreements and filed 83b exemptions on time. After a few months of work, 2 founders decided to have a less active role in the company and move to consulting roles. This demanded a restructuring of the shares to better reflect past and future contributions. Now, i will be getting 2X the numbers of shares i reported in the 83b form through a new purchase agreement. The FMV of the shares is the same.
    So
    i) Should submit an amendment to the IRS?
    ii) where i would find an amendment form?
    iii) or should i just resubmit a new 83b for the additional new shares? I read somewhere that an 83b can only be filed once.
    iV) Should i push for a private letter ruling confirmation for the change in numbers of shares?
    v) should i discuss this with a CPA or a tax lawyer?

    Thanks for your support of the entrepreneurial community
    Delfi

  • @Andrew - please read the disclaimers and check with your own advisors.

    i. If the shares are subject to a repurchase option, then a new 83(b) should be filed with respect to the newly issued shares.

    v. yes
  • Mary
    Great artical! We are the founders (two of us) of new start up company and we signed the Common Stock Purchase Agreement with Repurchase Option six month ago. We were so busy and did not do anthing after we signed the Agreement. We did not file the 83(b) either. Both of us did not actually pay to purchase the stock. Our questions are:
    1. do we have any tax issue?
    2. can we modify the Agreement?
    2. can we cancel the Agreement and start over again?
  • @Mary - if stock was actually issued to you, subject to a repurchase option/vesting, then you have a potentially serious problem if you haven't filed an 83(b) election. If the stock was never paid for, then you may be able to take the position that there was never any stock issued and the 83(b) election is not late. Please read the disclaimers and consult with your own advisors.
  • Arnold
    My understanding is that 83(b) does not apply if founders contributed property in return for stock. However to keep the founders together if the stock granted ALSO had a repurchase option at 110% of purchase price based on vesting schedule - does 83(b) apply? This agreement was done in 2003 so not sure what 83 (b) rules were then but no 83 (b) election was filed because council felt that contributed property in return for stock override the repurchase option clause. What are your thoughts?
  • @Arnold - I think you should have made an 83(b) election. It doesn't matter if the stock was purchased for cash or contribution of property. If the stock is subject to vesting, then it is likely that it may be considered in connection with services and Section 83 of the Internal Revenue Code applies. Please read the disclaimers and consult with your own advisors.
  • michelle8
    In your example above, assume the FMV is $.33 and they file an 83b election. What do they report on the 83b election? $.33 cents or $.01.

    How does it get reported on the employees tax return? Through the employer including it in the employees W2 or does the employee pick it up as other income on the 1040?
  • @michelle8 - Not sure what example you are talking about, but you would report it like the following:

    6. The fair market value at the time of transfer, determined without regard to any restriction other than a restriction which by its terms will never lapse, of such property is: $0.33

    7. The amount, if any, paid for such property: $0.01.

    Defer to accountants on how it is reported.
  • danconner
    If a founder's stock is purchased free of vesting but investors later impose vesting on the stock subject to a Vesting Agreement, does an 83(b) election need to be made?
  • @danconner - No.
  • sue
    Has anyone assigned a value of $0 for the 83b election or isit nedessary to assign say .01 cent
  • @sue - You could assign a value of $0 if you didn't pay for the shares and received them for free.
  • Yokum:

    Thanks for your extremely helpful posts. We have an LLC with my wife and I as founders. We've brought on a third co-founder and would like to issue additional shares to offer to him. Would the 83b election details you describe above be relevant to our situation, or are they only relevant to S- and C-Corporations?

    --Dean Richardson
  • @Dean - It depends on the type of LLC interest. If it is subject to vesting (i.e. a repurchase right), then yes. Please consult with your own attorney.
  • Greg
    Yokum - tremendously helpful insight in your post and replies. Thank you. I have one, perhaps basic question: if I made an 83b election in Dec '06 and the FMV and price paid were the same ($.01/share), and then I sold the stock in a transaction where a 3d party purchased (company did not exercise its right of first refusal and allowed the transaction to go through) my founders shares in Jan '08, do I owe simply owe the difference in b/w FMV and stock paid per share as long-term capital gains when I'm filing my '08 taxes now? Thank you in advance.
  • @Greg - please check with tax advisors. If your basis is original purchase price, then your gain = sale price - original purchase price. LTCG applies if held for more than a year.
  • david siewers
    ok, so a person has purchased restricted stock with 4 year vesting, and he has filed the 83b. He leaves after two years, and 50% of the shares are "repurchased" (really cancelled). Can the person take a loss on the stock not vested for which he paid for? How is that handled for tax purposes? anybody know?
  • @David - please check with tax advisors. In a typical repurchase, the repurchase price is the same as the purchase price, so there is no gain or loss, so no tax effect. In addition, in a typical purchase of restricted stock, there is no delta between FMV and purchase price at the time of purchase, so there is a no tax by making the 83(b) filing in that situation.
  • adam
    I am involved in a startup LLC that has 4 members. 2 'founders' that are not having their shares vest and then 2 other people they hired that will have shares vesting over a couple of years. There will only be one class of common shares. Two questions. 1) Does the company actually have to issue shares and if so, when? 2) Does this mean only the 2 of us that don't have vested shares have to file an 83(b) election?
  • Yokum, you have an amazing resource of a lot of value for entrepreneurs. Also thank you for taking the time to respond to these type of inquiries.
    I know that (missing) an 83b election is one of those things that can cause a lot of issues for the founders down the line. My fresh company just formed a C-Corp in Delaware - 10M shares @ $0.0001 as per your recommendation.

    We don't want to bother with issuance of founders stock nor stock restriction agreenment right now. Down the line we will have take care of the legal items when we have time and resources to address that.
    We plan to impose vesting restrictions on all the founders including myself.

    So my question is this: Can we simply not issue the stock now and really address this at a later time retroactively. It's my understanding that the company can continue to function without allocated shares, with me being the sole director. Thus I will have to do the 83b election at the allocation time-frame, or am I making a mistake by not taking care of these legal things now?
    Thank you so much!
  • @Ilya - If there is more than one founder, then failing to issue founders stock at the beginning may lead to arguments about who was promised what later. Not taking care of things properly in the beginning will be a hassle to fix later, which will results in significantly increased legal costs.
  • snj
    What are the rules around a restricted stock purchase agreement that has no vesting. Does it require an 83(b) filing? Does the owner of the stock required to recognize it as income as the stock gains value over time.

  • @snj - If there is no repurchase right (vesting), then there is no tax impact until the eventual sale of the stock.
  • JS
    Hi Yokum,

    I have just become an employee of a small private startup company and I will be getting restricted founders stock that vests over 3 years as compensation for service. The company has helped me fill out my 83b, but I'm not sure if the FMV that I'm told to use is correct.

    I am told to use the price that I paid for my shares as the FMV because there is no real FMV for my shares. My price was based on $0.001/share. But, I know that there were investors that have purchased non-vesting shares before I joined for $1/share.

    Would the purchase price for my founders shares be the FMV even if investors have paid a different amount per share? Do I need something from the company that states what the FMV is for my shares to back up my 83b claim to the IRS? If so, what kind of document would that be and how would the company calculate the FMV since there is no real value yet?
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