The 83(b) Election: The 30-Day Deadline Founders Miss

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The 83(b) election has a strict 30-day deadline. What it does, how to file Form 15620, and a worked founder example of the cost of missing it.

Most founders hear about the 83(b) election once, usually from a lawyer in the middle of a busy week, and then forget it. That's a problem, because it's one of the few tax decisions with a hard deadline and almost no way to fix it later.

The deadline is 30 days. Not 30 business days, and not "around tax time." Thirty calendar days from the date you receive restricted stock. Miss it and you can't file it late.

This article explains what the 83(b) election is, why it matters so much for startup founders and early employees, how to file it, and the mistakes we see most often. It's general information, not tax advice, but it should help you ask the right questions before the clock runs out.

First, what is restricted stock?

When founders start a company, they usually don't get their shares outright with no strings attached. The shares come with a vesting schedule. A common setup is four years with a one-year cliff: nothing vests in the first year, then a quarter vests at the one-year mark, and the rest vests monthly over the next three years.

Until shares vest, the company can usually buy them back if you leave. That's the "restriction." It protects your co-founders and investors. If someone walks away after three months, they don't walk away with a third of the company.

Vesting is good governance. But it creates a tax question.

The tax problem vesting creates

Under the default rule, restricted stock is taxed as it vests, not when you receive it. Each time a batch of shares vests, the value of those shares on that date counts as ordinary income to you.

At the start, that sounds harmless. Your new company is worth almost nothing, so the shares are worth almost nothing.

But companies grow. Say the company raises a seed round in year two and the share price jumps. Every batch of shares that vests after that point is now taxed at the higher value, as ordinary income, even though you haven't sold anything and may not have the cash to pay the tax. The bigger the company gets, the bigger the tax bill on each vesting date.

Founders have ended up owing real money on paper gains in a company that later failed. That's the trap.

What the 83(b) election does

The 83(b) election lets you choose to be taxed on the shares when you receive them, instead of when they vest.

If you file it, you report the value of all the restricted shares on the day you got them. For founders at the very start of a company, that value is often tiny, sometimes just what you paid for the shares. If you paid fair market value, the taxable amount can be zero.

After that, vesting is no longer a taxable event. When you eventually sell, the gain is generally treated as a capital gain, and your holding period starts from the date you received the shares, not from each vesting date. That can matter for long-term capital gains treatment and, for some companies, for the qualified small business stock rules.

In short: you accept a small tax now, often zero, to avoid a potentially large and unpredictable tax later.

Why the 30 days are so strict

The election must be filed with the IRS within 30 days of the date the stock is transferred to you. There's no extension, and the IRS generally doesn't accept late 83(b) elections.

A few details make this easy to miss:

  • The clock starts on the grant or transfer date, not when you sign a later document or open a cap table account.
  • Weekends and holidays count.
  • If the 30th day falls on a weekend or legal holiday, the deadline generally moves to the next business day, but don't plan around that.
  • Mailing it is what counts. The postmark date matters, so proof of mailing is important.

We often see founders realize the deadline exists on day 40, after a lawyer or investor asks for a copy. At that point the default vesting rules apply and there's usually nothing to be done.

How to file an 83(b) election

The filing itself is short. The election is a written statement that includes:

  • Your name, address and taxpayer identification number
  • A description of the property (for example, the number and class of shares and the company)
  • The date the property was transferred and the tax year
  • The restrictions on the property, such as the vesting schedule and repurchase right
  • The fair market value of the property at the time of transfer
  • The amount you paid for it
  • A statement that you've provided copies to the required people

The IRS has a form for this, Form 15620, but you can also use a written statement with the required information. Many startup lawyers provide a template as part of the founder stock paperwork.

Then:

  1. Sign and date it.
  2. Mail it to the IRS at the address for your area, within 30 days. Use certified mail with return receipt so you have proof of the postmark.
  3. Give a copy to the company. The company should keep it with its stock records.
  4. Keep your own copy with the certified mail receipt. Store it somewhere you'll be able to find in five or ten years, because investors and acquirers ask for it.

You generally no longer need to attach a copy to your personal tax return, but keep it with your records for that year anyway.

Who should think about filing

The election is most common for:

  • Founders receiving restricted stock at formation, when the value is very low
  • Early employees who are allowed to buy restricted stock or exercise options early, before they vest
  • Advisors receiving restricted stock instead of cash

It's usually not relevant if you receive fully vested shares, or if you hold stock options that you haven't exercised. Regular options work differently, and early exercise is a separate conversation with your own tradeoffs.

When filing might not make sense

The 83(b) election isn't automatic. It can be a worse choice if:

  • The shares are already worth a lot. If the value at grant is high and you pay less than that, you'd owe tax on the difference right away, on shares that could still be forfeited.
  • You're likely to leave before vesting. If you file, pay tax and then forfeit unvested shares, you generally can't deduct the tax you paid on them.
  • The company's future is very uncertain and the current value is meaningful. You'd be paying tax upfront on something that might end up worthless.

For most founders at formation, when the shares are worth close to nothing, the math usually favors filing. But "usually" isn't "always," so this is a decision to make with a tax professional who knows your numbers.

Common mistakes we see

Waiting for the lawyer to file it. In many cases the lawyer prepares the form, but you sign and mail it. Ask directly: "Who is mailing my 83(b), and when?"

No proof of mailing. Regular mail with no receipt leaves you with nothing to show if the IRS or an investor asks. Certified mail is cheap insurance.

Wrong value. The fair market value needs a sensible basis, especially once the company has raised money or has a 409A valuation. Picking a number out of the air invites problems.

Forgetting to give the company a copy. Investors doing due diligence will ask the company for every founder's 83(b). Missing copies slow down a financing.

Losing the paperwork. Years later, during an acquisition, someone will ask for proof. If you can't find it, that can become a headache.

Assuming it's only for big startups. A two-person company with a vesting schedule has the same issue as a venture-backed one.

How this connects to your cap table

Your cap table should record each founder's shares, the vesting schedule, the grant date and whether an 83(b) election was filed. That last column is easy to forget and painful to reconstruct later.

If you're issuing founder stock now, put these on one checklist:

  • Board approval of the stock issuance
  • Signed stock purchase agreement with the vesting terms
  • Payment for the shares, even if it's a small amount
  • 83(b) election mailed within 30 days, with proof
  • Cap table updated with all of the above

A worked example

Say two founders form a Delaware C corp and each buys 4,000,000 shares at $0.0001 a share, so each pays $400. The shares vest over 4 years with a 1-year cliff.

If a founder files an 83(b) election within 30 days of the purchase, they report income equal to the value minus what they paid. Here that is $400 minus $400, so $0 of income today. As shares vest later, nothing more is taxed until they sell, and the holding period for long-term capital gains starts now.

If they skip it, the tax shows up at each vesting date instead. If the company raises a round and the shares are worth $0.50 when the first 1,000,000 vest at the cliff, that is $500,000 of ordinary income on paper with no cash to pay it. At the 37% top federal rate that could be about $185,000 of federal tax before any state tax, and for a founder who is also an employee it shows up on Form W-2 and flows to Form 1040. The IRS form that makes this filing easier is Form 15620, and you keep proof of the mailing date.

Sources: 26 U.S.C. section 83; IRS, Form 15620, Section 83(b) Election; IRS, Internal Revenue Bulletin 2012-28 (Rev. Proc. 2012-29, sample 83(b) elections).

The short version

  • Restricted stock is normally taxed as it vests, at whatever it's worth on each vesting date.
  • The 83(b) election lets you be taxed on the value when you receive it instead.
  • For founders at formation, that value is often tiny, which can save a lot later.
  • You have 30 calendar days from the transfer. There's no late filing.
  • Mail it certified, give the company a copy and keep your own.
  • It isn't always the right choice, so check your numbers with a tax pro.

This article is general information, not tax or legal advice. Talk with a qualified tax professional or attorney about your specific situation before filing.

RKube Services helps founders and small businesses with cap tables, bookkeeping, payroll and tax prep support across North Carolina and the US. If you're setting up founder equity and want the records done right from day one, call (984) 234-7030 or visit rkubeservices.com.

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