83(b) Elections For Dummies

83(b) Elections For Dummies

First, a few basics: • If you have stock options, you do not need to file an 83(b) Election Form. • If you purchased/received founder's stock and there are no restrictions, such as vesting, you do not need to file an 83(b) Election Form.   Here is why you want to file an 83(b) Election:   Let's give an example to show the consequences of not filing an 83(b) election: • You own 10% of the stock of your startup. It vests over 4 years, or 25% per year. • You purchased this stock for $100 (fair market value) on January 1 of Year 1. • During Year 1, the Company raised some outside financing that values the company at $10M. • At the end of Year 1, the value of the Company is $10M and the value of your stock is worth $1M. • You have about $250K in taxable income in Year 1 ( [value of Company at year-end, $10M less value of Company at beginning of year, $1K] * ownership percentage, 10% * vesting % in Year 1, 25%). • You owe about $100K in Federal and State taxes.

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