83(b) Elections and Substantial Risks of Forfeiture

You might be nervous. Maybe you didn't file an 83(b) election and now you think you should have. The 30 day deadline has long since passed. 

You talk to your accountant. He tells you that you didn't have to file. You feel somewhat reassured, but you are still nervous. You start reading articles on line and you can't find any solace.

What do you do?

If you want to get a definitive answer on whether you should have filed an 83(b) election or not, and the time is passed, here is what I suggest:

1) Gather all of the documents pursuant to which you received your shares. This would include perhaps a stock purchase agreement. There might be provisions in the company's bylaws that impose rights of first refusal. Maybe you received your stock pursuant to stock options. In that case, you will want to gather all of the stock option plan documents.

2) Once you have gathered the documents, all of them, put them together along with a list of all of them to send them to an attorney or a CPA familiar with these rules.

3) Your attorney or CPA can move through the documents the pretty quickly once they are all gathered and in one place. What he or she will be looking for is this:

  • A buy back right in favor of the company at cost, or perhaps at the lower of cost or FMV.
  • It doesn't matter if you paid FMV for your shares when you purchased them. What matters is whether there were service based vesting conditions on your shares.
  • The most typical service based vesting condition is a repurchase right in favor of the company, at the lower of cost or FMV, which repurchase right lapses over a service period.
  • For example, in the famous Alves tax case, the executive purchased the shares at a dime a share, and the company had the right to buy back a certain number of shares at a dime a share if the executive wasn't still working for the company 4 years later. The executive didn't file an 83(b) election, and disaster struck.

4) Missing an 83(b) election is a terrible mistake, but if the time for making the election has passed, and you are looking for reassurance that you didn't have to file, don't panic. Gather the documents and go see an attorney or CPA familiar with these rules.