Avoiding that 83(b) sting
It's the only time I'll voluntarily do taxes early...
Hey founders et al. In today’s edition, we explore another fun tax item—the 83(b) election. We also highlight another great attorney and throw out some helpful resources.
Quick note: Next week, we will be taking a short spring break from the newsletter. Don’t fret, we’ll be back in the first full week of April! Happy spring, people!
Don’t forget to (b) yourself
If you’re a founder or early employee and you haven’t had a mini-anxiety attack over an 83(b), consider yourself lucky. Here’s a short eli5 for the IRS 83(b) election: if your shares are subject to a vesting schedule (likely if you are incorporating and intend to raise venture capital), you can elect to be taxed NOW (the time of election) for the current fair market value of your unvested shares (hopefully = next to nothing) instead of the fair market value when they actually vest (hopefully = way more than nothing). However, you need to make sure you execute on the below steps to nail the 83(b) process, otherwise you’ll have to come up with some creative solutions to remedy your error.
File a federal form known as an 83(b) Election within 30 days of the board consent that authorized the issuance of such stock. Don’t forget that “board consent” piece!
Use USPS certified mail and keep the certified mail receipt so that you have proof (from USPS, a government entity) that you mailed the 83(b) before the 30-day deadline.
Make and keep three extra copies of the 83(b)--one to file with your year-end tax return, another for the company's archive, and a final one for your own personal archive.
Don’t expect the government to give you confirmation of the filing. Generally, the 83(b) will only come into play down the road once you sell your stock, if the IRS audits you to determine whether you really did file it on time.
Tools and Resources
There are some excellent resources out there that founders may not know about. We are always adding to this list. See the full list of resources here.
For non-US founders: I’ve seen this question come up a lot: “Our company has non-US based founders—do they need to file an 83(b) with the IRS?” The IRS has not provided explicit guidance on whether a non-US taxpayer may make an 83(b) election. Nevertheless, in most cases, startup lawyers typically advise anyone who acquires startup stock that is subject to vesting to file an 83(b) election with the IRS. For info on how to best do this, check out this article.
AngelList Stack: I can speak personally about using AngelList Stack to incorporate and manage the nitty gritty things like 83(b) filings and the associated board consents. They are truly building out a “stack” of tools to help you manage everything from corporate formation to fundraising to your cap table. If you are looking to raise venture money down the line, take a look at their suite of tools. They certainly have taken care of a lot of the nuanced legal things in the beginning of the founder journey so that I can focus on the bigger picture. Don’t worry, I don’t make a cent from this (they don’t even know I’m writing about them). There are also plenty of other players in this space worth checking out, including Stripe Atlas and Gust.
Have any resources you'd recommend to other founders? Please fill out this form.
Lawyer Spotlight
We love highlighting founder-friendly lawyers doing great work in startup spaces. Check out our database of founder-friendly firms and lawyers for previously highlighted lawyers.
“Alexander has been great to work with, and I know that I can always count on prompt, thorough research and recommendations that allow us to move our business forward. Whether Alexander is assisting us in commercial matters, or providing in-depth research on regulatory issues related to new product development, Alexander is always responsive and professional, and delivers work product that is clear and thorough.”
Reviewing client profile: Fintech, enterprise SaaS.
Work completed for reviewing client: consumer disclosures, contract negotiations for large partnerships, consumer fintech regulatory product analysis and review.
Alexander Gershen serves as product counsel to early stage technology companies particularly in fintech and financial services, and is an experienced class action and regulatory litigator. Alexander represents clients at each stage of the product development process and regularly advises on lending, money transmission, and real estate related products and services. He also represents clients in state and federal litigation and in connection with regulatory enforcement and investigations.
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Thanks for reading. Stay lawyerly.
Brian