Why the Founder 83b Election is Critical to File on Time if Founder Stock Vests

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Without an 83b election, startup founders (or startup co-founders) have a potential tax liability every time founder shares (stock or LLC units) vests. That can result in a hefty tax bill! The situation arises when founder ownership has some type of vesting, such as a declining buy-back right on the part of the company.
As we've suggested in previous videos, some type of founder vesting (co-founder vesting) of founder stock (or founder units in an LLC) is a good idea if you use equity compensation because it prevents a founder from leaving the company early and keeping a large ownership in the company without having to do the hard work of helping make that ownership valuable.
This video is part of a series on building a startup team.

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Опубликовано:

26 июл 2021

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Комментарии : 13

@user-hf7zh8qd2h Год назад

Great teacher! Thank you!!

@xanderjones2747 2 года назад

Great information, thanks.

@TheWisdomPotChannel 3 года назад

I love your teachings Steve. You make finance come to life

@Startupsos 3 года назад

Thanks!

@R6Talal 2 года назад

What happens if you submit it later than 30 days?

@damiennguyen7967 2 года назад

Hello Steve, my question is: if I am vesting shares to a co-founder and they sign an 83(b) election form, would I as the original owner have to sign one too? Thank you!

@Startupsos 2 года назад

I don't believe there is any reason you, as the original owner, need to vest your shares just because you are having others' vest their shares. As the original founder, it makes sense that you want to protect the stock ownership in case people leave the company early. But if you seek an investment, you may find that a sophisticated investor will make vesting for all founders, including you, a requirement before they will invest. So sooner or later, you too may have a vesting requirement, and there can be advantages in you setting that vesting up proactively with terms that are reasonably favorable (e.g. perhaps with some up-front vesting) but terms that are sufficiently balance to still be acceptable to an investor.

@palermo117 2 года назад

Thanks for the insights, very very helpful! a quick question please: if I'm the sole owner of my LLC (owner of 100% of shares), I don't need to sign the 83b election since I won't forfeit, is that right? Once I bring more investors for equity, I'd need a different ownership agreement, and then we all need to sign the 83b election within 30 days. That's what I understood from your video. Can you kindly confirm? Many thanks again!

@Startupsos 2 года назад

Yes - an 83b is needed only if there is a chance that you will forfeit some of your ownership as a result of some kind of "vesting" agreement

@migo-migo9503 2 года назад

Thanks Steve! That was helpful. So when I signed my 83(b), and say the price was $0, if there is a liquidity event a year later, and the price has gone up to $10, will I need to pay taxes that year?

@Startupsos 2 года назад

You might talk to a lawyer or accountant about the price - $0 is probably a bit low! If the liquidity event is a cash purchase, then you are selling your stock and that would certainly be a capital gain that's taxable. If the liquidity event is a stock swap with a purchasing company, then you'd need to check with your accountant to see if that's a taxable gain. It might be that you would not pay taxes until you sold the stock you'd obtained in the new company, but that's a question for a CPA, and it might well depend on exactly how the stock-swap is engineered.

@migo-migo9503 2 года назад

@@Startupsos Thank you, that helps! I really appreciate you taking the time to answer the question. Take care!