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The 83B Election

avc.com

46 pointsmmq20 comments

But ... why?

I buy risky stocks. They go up. I am lucky I pay tax on the profit. All good

To me this smacks of using taxpayer money to subsidise founders in incentivising their employees. Yes it's a risky investment. If it's you and co-founders, go for your life. The minute it's an "employee" either give them more stock to compensate for the tax to come or pay them so the lower equity does not matter.

At some point stop shooting for the moon and start being part of society.

if society is so shit we need millions to get out of it, there's your problem

I don’t entirely disagree with you, but I would argue the change should come from the government directly with the tax code, not the companies themselves.

The tax code is an arbitrary set of constraints to an optimization problem that startups are solving to maximize the value of the money (and its runway) that has been invested into them. And with such a high startup failure rate in general, I can’t blame them for using the available levers to make that funding go as far as possible, even if that results in strange ways of incentivizing employees.

> using taxpayer money to subsidise founders

This is exactly what this is. When I buy stock, I’m passively contributing to society. Founders actively create value. This isn’t my hill to die on. But I see the value in incentivising risk-taking.

But there surely are many ways to incentivise founding of companies (we want) that do not look suspiciously like tax handouts to rich people.

I get the idea no-one has managed to reproduce silicon valley. But that started life as decades long military investment in future tech. it's hard to argue that motivated governments could not repeat for green tech, bio tech etc.

> The minute it's an "employee" either give them more stock to compensate for the tax to come or pay them so the lower equity does not matter.

Okay but in practice you can't rely on the employer/founders paying the tax for the employees, and because money is fungible, a tax on the employee is equivalent to a tax on the employers. Even if you pass a law so that all the burden is on the employer, because of the previous point it will still be the employee paying.

The risk is exponentially higher as the 409a goes up. That said, given your current life (single, 20s, with some cash on hand and truly vested in a company) and the total cost to exercise (maybe $1-2k) it might make sense. But a lot of things have to line up for this to be beneficial, otherwise you’re better put the money on a roulette table.

If you are a founder and even if you are not resident in US, do file it (just in case). The cost is likely a visit to the Post office and price on the stamps (prior to e-signing becomes the norm/official).

I've worked at 2 startups where we bought our private stock for $0.001 (tenth of a penny) a share. It had some internally made up value and we pad taxes on the difference. It was explained to me that if we had an IPO in the future that the taxes would be long term capital gains rates instead of short term because we had held the stock over a year. In the end I spent $200, both startups failed, and I lost my $200. It's more of a silly story and a warning against believing anything startup founders tell you.

I don't live in the US so I don't feel very concerned but I still wonder. What happen if you loose your job before vesting? My understanding is that you loose your promised shares in that case. If you are worried about this happening, wouldn't that make 83b election a risky bet ? You would not want to risk paying taxes on money you never saw the color of, would you ? Or is there mechanisms for getting those paid taxes back ?

Typically the 83b is only helpful when the strike price is low enough that exercising is "cheap." Once a company raises its series A, exercising crosses ~$50k, and the risk is too high for most people.

Relatedly, you can spot a bad startup by them refusing to let you 83b early exercise. It's a pretty clear sign that either the founder or the investors don't have the sense to care about their employee compensation, and probably they're being pound-foolish about a bunch of other things too.

What's the reasoning by the IRS to not refund you if for some reason you do not receive the shares you are paying taxes early on?

Instead of doing this, simply don't have the assets vest and own them fully at the beginning at essentially a $0 cost basis. If you're the founder you should stack all the cards in your favor. Vesting periods should be for employees - also make sure they have long cliffs so you can claw back their equity.

Companies take a huge time to realize value, say 4-10 years. And many startups have more than one founder. In that case, founder vesting is an essential tool to ensure alignment over the years.

Filing an 83(b) is easy. It's certainly worth it to: a) Have founder vesting to align incentives for long-term work b) File 83(b)s

From what I've witnessed, if you get any real investors, they'll make you vest for your ownership anyway. When you have enough investors, you're essentially an employee (some successful companies / founders are the exception.)

Im guessing this is too risky/expensive to use for unicorns/late stage startups.

Unfortunately it doesn’t seem like this applies to RSUs.

What resource leads you to believe otherwise?

The 83(b) election applies to RSUs [1]

It even applies to ISOs (if your company allows you to "exercise early", i.e. pre-vesting).

The important thing to note is that the deadline timer for an 83(b) starts ticking at granting, not at vesting, which is a date that most people don't hold in their heads as important.

[1]: https://www.investopedia.com/articles/tax/09/restricted-stoc...

RSU taxes are paid at time of vest: there is no alternative that I'm aware of to that. This comment is wrong

The link above confirms this "Taxation of RSUs The taxation of RSUs is a bit simpler than for standard restricted stock plans. Because there is no actual stock issued at grant, no Section 83(b) election is permitted. This means that there is only one date in the life of the plan on which the value of the stock can be declared. The amount reported will equal the fair market value of the stock on the date of vesting, which is also the date of delivery in this case. Therefore, the value of the stock is reported as ordinary income in the year the stock becomes vested."

It appaeared like the investopedia article I linked contains contradictory information. In one passage it says you can elect 83(b) at grant. In the section you quote, it says you can't.

As it turns out, the information isn't actually contradictory, but it is unclear. The first passage I linked refers to RS (Restricted Stock) whereas the second refers to RSUs (Restricted Stock *Units*), which are two different things (TIL).

Here's an article that explains the difference [1], the TLDR is that RSUs convert from "units" into stock upon vesting, whereas RSs are stocks that already exist at grant time and are merely transferred upon vesting. That difference means that you can claim 83(b) on RSs but not on RSUs. Fascinating.

[1]: https://hudsonoakwealth.com/giving-tree/2019/6/21/should-you...

RSU != Restricted Stock even though the names are quite similar

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