Show HN: Managed 83(b) Elections from Clerky (YC S11)
We just announced a new add-on for 83(b) elections and I thought some people here might be interested in the nitty gritty of the decisions that went into it. If you've never heard of an 83(b) election before, I've included a brief explanation at the bottom here. Unfortunately, the nature of a tax election is that it isn't really something you can try out for yourself on a whim, but if you think you might ever start a startup, check us out at https://www.clerky.com :) You and your co-founders will get a prompt to use this new add-on right after issuing shares to yourselves. If you add a new co-founder or issue restricted stock to employees from a stock plan through Clerky, they'll be able to use the add-on too.
83(b) elections have historically been a pain to make because the IRS required physical signatures on the election and you had to mail it in (there is no e-file option) within 30 days. When we launched in 2013 and brought standard startup formation paperwork online, we were able to get rid of another huge kludge — stock certificates — with uncertificated shares. But we couldn't do much about 83(b) elections because of the physical signature requirement, which has always annoyed us.
To our delight, the IRS recently announced they would allow electronic signatures for 83(b) elections. It's provisional, but it seems likely they'll make it permanent at some point. This is a huge deal because that makes it possible for us to print and send the 83(b) election in for people, which makes it finally possible to bring 83(b) elections online.
It's obviously easy to mail a piece of paper, but our add-on does a lot more than that. Here are all the things it does:
* Sends it via Priority Mail with Certified Mail service
* Obtains postmark for the Certified Mail receipt from a USPS office
* Alerts you if the election is not delivered on the expected delivery date so you can decide whether you want to wait longer or send another
* Requests a physical return receipt from the IRS
* If the physical return receipt isn't received, submits PS Form 3811-A to the USPS to get delivery information for the return receipt
* Asks the IRS to send a file-stamped copy of your 83(b) election back via a self-addressed prepaid Priority Mail envelope with Certified Mail tracking
* Scans and uploads evidence of your election to your account as it comes in
* Stores the physical evidence in secure offsite file storage
* At your request, sends the physical evidence back to you via your choice of Registered Mail (the most secure service the USPS provides) or Priority Mail (faster than Registered Mail)
Why does our add-on do more than what's necessary? This is the interesting part to me because I think it's a good illustration of how there can be non-obvious depth when it comes to legal paperwork. This is something that a lot of companies don't realize or willfully ignore when they build online legal services.
What's key to understand is that in a venture capital financing, acquisition, or IPO, attorneys will be reviewing your company's legal paperwork in a process called legal due diligence. The purpose of legal due diligence is to identify issues with the company's legal paperwork that could have a significant effect on the company. Part of that is making sure people who received shares subject to vesting made 83(b) elections, which is important given how much could be at stake and because it can be impossible or extremely painful to fix a missed 83(b) election.
In legal due diligence, the company's goal is not just to be able to make it through the review, but to make it through the review quickly and painlessly. Time is the enemy because it introduces risk that something will happen that puts the transaction (i.e. the financing, acquisition, or IPO) at risk. An investor might get cold feet, an acquirer might change their priorities, the IPO window might close, etc.
This means that you don't just want to make an 83(b) election, you want to be able to prove you made one. And you don't just want to be able to prove you made one, you want to be able to quickly convince attorneys that you can prove it.
With this in mind, our process is designed to optimize for getting the file-stamped copy back from the IRS, since that's the most undeniable proof of a successful 83(b) election. That naturally starts with maximizing the chance that the 83(b) election reaches the IRS, which is why our add-on sends it via Priority Mail instead of First Class. For the same reason, the self-addressed envelope enclosed for the file-stamped copy is prepaid for Priority Mail instead of First Class.
Even if the IRS sends the file-stamped copy back, it may get lost in the mail system. Our add-on includes Certified Mail service for the self-addressed return envelope so that if this happens, you'll at least have proof that the IRS mailed it back to you. More commonly, the IRS might skip sending the file-stamped copy back. To address this, our add-on requests a return receipt for your 83(b) election, so there's at least proof the IRS received it. If the return receipt itself is lost (also not uncommon), our add-on will submit PS Form 3811-A to the USPS to get delivery information for the return receipt.
What if it's not clear that the IRS received your election? Or they receive it but claim you filed it too late? This where the postmarked Certified Mail receipt comes in. Under IRS regulations, the 83(b) election will be considered to have been received by the IRS as of the postmark date on the Certified Mail receipt. Under those same regulations, the postmarked Certified Mail receipt is considered evidence that the IRS received the mail. It's worth noting that you could still run into problems if the IRS is able to prove that the USPS never delivered to the IRS, even if you have the postmarked Certified Mail receipt. That's why our add-on will monitor the tracking and let you know if the expected delivery date is missed, so you can decide if you want to send another or not.
Since the goal of this entire process is to minimize the chance of problems in legal due diligence, we'll scan and upload evidence of your 83(b) election to your account as it comes in. That way it'll be easily accessible when you need it. We'll also store the physical evidence in case the authenticity of the scanned evidence is ever called into question (uncommon but not unthinkable). If that happens, or if you just prefer to hang onto everything yourself, we offer Registered Mail as an option for sending the physical evidence to you because it's the most secure service the USPS offers. For the uninitiated, the USPS keeps registered mail in locked containers and rooms away from regular mail, with access logs tracking everyone who accesses the mail. The US government considers it secure enough to use for sending materials classified as Secret. The USPS even requires covering any seams with tamper-evident tape. The downside of all this special handling is that Registered Mail can be very slow, so we also offer non-registered Priority Mail as an option.
Hope all of this was interesting for some folks here :) This is how I would want my 83(b) election handled if I were filing one, so I'm really excited to be rolling this out at last. If anyone has any questions about any of this, or about startup law in general, feel free to ask on this thread! Happy to answer anything I can.
======================================================
What's an 83(b) election?
If, like most people, you've never heard of an 83(b) election, it's basically an election you make with the IRS for shares that are subject to vesting. If you're not familiar with vesting, it's helpful to first know that startups usually issue shares to employees and other service providers with a right to repurchase some of the shares if the recipient leaves the company. Over time, the number of shares the company can repurchase decreases. Each time there are some new shares the company loses the right to repurchase, the recipient is considered to have vested in those shares. We have a handbook article on vesting, in case you want to learn more: https://handbook.clerky.com/formation/vesting.
People make 83(b) elections with the IRS to have them tax shares at the time they're received, rather than each time some of them vest. That's desirable is because you're taxed on the difference between what you paid for shares and what they're worth — and with most startups, that difference is only going to get larger over time. It's also a really big pain to have to figure out the value of the shares every month (the most common interval for vesting). We go into all of this in a little more detail here: https://handbook.clerky.com/formation/83b-elections.