The Section 83(b) Election: Why It Matters for Founders’ Equity

Equity compensation is a powerful tool to attract and retain founding team members—but it comes with tax nuances that can have a major impact on your upside. The Section 83(b) election is one of the most important elections a founder can make, and yet it’s frequently misunderstood or even overlooked.

What Is a Section 83(b) Election?

When you receive restricted stock or other property subject to vesting, the IRS by default taxes you as those shares vest—i.e., as they become “substantially vested” or transferable. A Section 83(b) election lets you accelerate that tax event to the grant date, at the price you paid (often nominal).

• Without 83(b): You pay ordinary income tax on the fair market value (FMV) at each vesting date.

• With 83(b): You pay income tax immediately on the FMV at grant (often zero or minimal), and all future appreciation is taxed at the lower capital-gains rate once you sell.

Why Founders Should Care

1. Tax Savings

   • If your company’s value grows, the difference between grant-date FMV and vest-date FMV can be substantial. Accelerating tax on the smaller grant-date value maximizes your post-liquidation proceeds.

2. Capital Gains Treatment

   • Once you’ve made the election, you start the clock on the 12-month holding period for long-term capital gains immediately, rather than waiting for each vesting tranche.

3. Simplicity

   • You lock in one tax event instead of multiple events, easing administrative burden and cash-flow forecasting.

Key Risks and Considerations

• Up-Front Tax Payment
  You must be able to pay the ordinary-income tax on the grant-date FMV—even if you haven’t sold any shares yet.

• Forfeiture Risk
  If you leave before full vesting and forfeit unvested shares, you’ve paid tax on shares you never actually keep.

• No Turning Back
  The election must be made within 30 days of the grant. Late elections are irrevocable.

How to Make the Election

1. Prepare the 83(b) Form

   • Include your name, address, taxpayer ID, description of property, date of transfer, election date, FMV, amount paid, and a statement under Section 83(b).

2. File with the IRS

   • Mail (or e-file, where available) within 30 days of the grant.

3. Notify Your Employer

   • Provide a copy to your company’s payroll or equity-administration team.

4. Attach to Your Tax Return

   • Retain proof of mailing and include the filed election with your tax return for that year.

Practical Tips for Founders

• Plan Cash Flow: Ensure you have funds to cover the tax liability.

• Document Everything: Keep copies of the form, proof of filing, and corporate grant documents.

• Consult Early: Work with your tax and legal advisors before accepting any equity.

• Coordinate with Co-founders: Align election decisions across key team members to avoid surprises.

A timely Section 83(b) election can mean significant tax savings and cleaner record-keeping for founders—yet the 30-day window is unforgiving. If you’re negotiating your startup equity or planning your personal tax strategy, don’t leave this election to chance.

Need help evaluating an 83(b) election or structuring your founder equity? Contact us at 786-461-1617 to schedule a consultation.