Section 83(b) Elections

I received a panicked call from a founder the other day. The call went like this. (Disclaimer: I didn't incorporate this company; they were a new client to me.)

Founder: We didn't file 83(b) elections. Are we in trouble?

Me: Were your founder shares subject to vesting?

Founder: What do you mean by vesting?

Me: Were the shares subject to a repurchase right in favor of the company at the lesser of the purchase price for the shares or fair market value, which repurchase right lapsed over a service based vesting period?

Founder: No. The company doesn't have any rights to repurchase our shares.

Me: Well, if there is no vesting then no 83(b) election is due, but you should send me your corporate documents so that I can confirm.

Postscript: I've run into this a lot. A vague sense of unease about the failure to file something. And horrible consequences that might follow.

Not filing an 83(b) election within 30 days of receiving shares subject to vesting is a horrible mistake. What happens then is when the shares vest the service provider has income equal to the difference between the then FMV of the shares and what they paid for them. If the value of the company's stock has gone up the taxes can be significant. More than the service provider can pay. And if the service provider is an employee the company is supposed to withhold income and employment taxes. This is why in due diligence investors typically want a representation and warranty that all 83(b) elections have been timely filed. 

The 30 day deadline is short. Make sure not to miss it if you are required to file an 83(b) election. I also recommend you file the election certified mail, return receipt requested, and send a copy and self addressed stamped envelope and ask the IRS to confirm receipt and return the confirm copy to you.

I've written an example letter you can send to the IRS with your 83(b) election and posted it on Scribd. You can find it here: http://www.scribd.com/doc/59825408/EXAMPLE-83-b-Letter-to-IRS-Individual#scribd