Startup Vesting Stock Tax Election “83(b)”

Startup Vesting Stock Tax Election “83(b)”

By Chase Addams, a San Francisco Business Attorney 83(b) Election You’re getting hired by a fledgling San Francisco Start-Up company, and you’ve just signed a Stock Purchase Agreement granting you a vesting equity interest in the Company.  Congratulations and good luck.  But watch out.  Upon the initial grant of this stock to you, the clock starts running on your ability to make an 83(b) election under the Internal Revenue Code of 1986.  You have 30 days from the date of grant.  So what does that mean to you and what should you do? At some point you have to report to the IRS (and get taxed for) the difference between the fair market value of the equity you’ve been given, and the price you paid for it (the “difference”).  This reporting can either happen when you purchase the equity OR when your equity is actually freed of restrictions (ie, the Company’s repurchase right expires) and the shares vest to you.  The difference is taxed as ordinary compensatory income.  To be clear, in instances where equity is granted immediately and there is no vesting schedule, there is no decision to make and 83(b) does not apply.  After vesting, when you’re ready to sell your equity or otherwise dispose of it pursuant to the terms of her Company Stock Purchase Agreement, the transaction will be taxed again as a capital gain. The 83(b) election is a directive to the IRS to assess taxes on the difference at the time of stock purchase.  While the fair market value at the time of stock purchase will oftentimes equal the amount paid, the IRS...