The Founder’s Guide to 83(b) Elections

Look, I get it. You’re busy building the next big thing, and the last thing you want to think about is some obscure tax election. But here’s the thing: understanding 83(b) elections could literally save you thousands – maybe even millions – in taxes down the road. And you’ve got exactly 30 days from getting your founder shares to figure this out. No pressure, right?

Let’s break this down in plain English, because your time is valuable and tax code is, well, not exactly light reading.

What’s an 83(b) Election (and Why Should You Care)?

Think of an 83(b) election like locking in early-bird pricing on your taxes. Instead of paying taxes on your shares as they vest over time (when they might be worth a lot more), you’re telling the IRS, “Hey, I want to pay my taxes now when these shares are worth basically nothing.”

Here’s why this matters: Let’s say you get 1 million shares at $0.001 per share (that’s $1,000 total value). Without an 83(b) election, you’ll pay income tax on the shares’ fair market value as they vest. So if your company takes off and those shares are worth $1 each when they vest, you’re looking at paying income taxes on $250,000 worth of shares each year for four years. Ouch.

But with an 83(b) election, you pay taxes on that initial $1,000 value upfront. Then, any appreciation is treated as long-term capital gains when you eventually sell, provided you wait at least one year from the date of filing. This is the difference between paying your regular income tax rate (up to 37%) and the long-term capital gains rate (usually 15-20%).

The Good, The Bad, and The “Oh Crud, I Missed the Deadline”

The Good Stuff

• Pay taxes on the lowest possible value
• Future appreciation gets that sweet long term capital gains treatment
• No surprise tax bills as shares vest
• Start your clock on QSBS treatment (which could mean zero federal taxes on millions in gains)

The Not-So-Good Stuff

• You have to pay taxes upfront (even though the shares aren’t vested)
• If the company tanks, you can’t get those taxes back
• If you leave before vesting, those taxes are gone forever
• That 30-day deadline is absolutely non-negotiable

How to Actually File This Thing

The IRS recently made this easier by introducing Form 15620 in November 2024. Here’s your step-by-step:

1. Download Form 15620 from the IRS website (or draft your own letter if you’re feeling fancy)
2. Fill it out with details about you, your company, and the stock grant
3. Mail it to the IRS where you file your tax return
4. Send a copy to your company
5. Keep a copy (and proof of mailing) for yourself

Pro tip: Send it certified mail with return receipt. Trust me, you want proof you filed this thing on time.

Real Talk: When Does This Make Sense?

Filing an 83(b) election usually makes sense for founders because:

• Your initial stock value is typically super low
• You’re (hopefully) in it for the long haul
• The potential upside is worth the small upfront tax hit

But there’s a catch: you need to have cash available to pay those upfront taxes. And you need to be reasonably confident you’ll stick around through the vesting period.

Horror Stories (And How to Avoid Them)

I’ve seen founders mess this up in spectacular ways. Like the founder who thought they had 30 business days instead of calendar days. Or the one who filed perfectly but forgot to give a copy to their company. Don’t be those people.

The biggest horror story? The founder who didn’t file because their shares were “only worth a few thousand dollars.” Three years later, those shares were worth millions, and they were stuck paying income tax rates on all of it. Oops.

The Term Sheet Plot Twist

Here’s where things get spicy. Picture this: you’re sipping your coffee one morning when a term sheet lands in your inbox. Even before the ink is dry, something huge just happened to your tax situation: your company suddenly has an official price tag.

Why? Because a VC just wrote down, in black and white, exactly what they think your company is worth. And the IRS loves this kind of third-party validation – it’s basically the definition of “fair market value.”

If you skipped the 83(b) election and you’re still vesting, this is where it hurts. Your upcoming vesting events will now be priced at this new valuation. Translation: you’ll owe income tax on the difference between your dirt-cheap purchase price and this new sky-high valuation – all for stock you can’t even sell yet. Fun times!

This is exactly why that 83(b) election could have been your best friend. By paying taxes on the initial value upfront, you would have avoided this whole valuation domino effect on your tax bill.

FAQ: The Stuff You’re Too Afraid to Ask

What To Do Right Now

1. Check if you’ve received restricted stock in the last 30 days
2. If yes, talk to your tax advisor ASAP (like, today)
3. Get a clear understanding of your share value
4. Decide if you can afford the upfront tax payment
5. File that election if it makes sense (remember: certified mail!)

The Bottom Line

Look, I’m not your tax advisor, and this isn’t personal tax advice. But if you’re a founder who just got shares, you need to at least consider an 83(b) election. It’s one of those decisions that seems small now but can have massive implications down the road.

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Disclaimer: The content provided in this blog is for informational purposes only and should not be considered as financial, legal, or tax advice. Wolf Pine Capital does not guarantee the accuracy or completeness of any information provided herein. Please consult with a qualified professional regarding your specific situation before making any financial decisions. All investments involve risk, and past performance is no guarantee of future results.