What is an 83(b) election and why is it important?
Takeaway: The 83(b) election is the single most important, time-sensitive tax form a founder will ever sign; filing it within 30 days of receiving your stock can save you from a potentially catastrophic, multi-million dollar tax bill in the future.
This is not a drill. This is not a "nice-to-have." For a founder receiving stock that is subject to vesting, filing an 83(b) election with the IRS is an absolutely critical, non-negotiable step with a brutally unforgiving deadline. A failure to file this simple, one-page form can have devastating personal tax consequences that can jeopardize your financial future.
What is an 83(b) Election?
An 83(b) election is a letter you send to the IRS that makes a specific election under Section 83(b) of the Internal Revenue Code.
Here's the situation: You have just purchased your founder's stock, but it is "unvested." This means you have a "substantial risk of forfeiture"—if you leave the company, you forfeit the unvested shares. The tax code says that you don't technically have to pay taxes on the stock until it vests, at which point its value is treated as income.
The 83(b) election allows you to make a choice. You are electing to pay taxes on the value of the stock today, when it is granted, rather than waiting to pay taxes as it vests in the future.
Why This is a "No-Brainer" Decision
Why would you choose to pay taxes now? Because at the moment of incorporation, the fair market value of your stock is virtually zero.
Example:
You purchase 8 million shares of founder stock at $0.00001 per share. The total value of your stock is $80. By filing an 83(b) election, you are telling the IRS you are recognizing $80 of ordinary income today. Since the amount is so small, your tax liability is effectively $0.
The Catastrophe of Not Filing: Let's say you don't file an 83(b). One year later, your first "cliff" of 2 million shares vests. In that year, you've raised a seed round, and the fair market value of your stock is now $0.50 per share. The IRS now views the vesting of those 2 million shares as a taxable event. You have just received $1,000,000 of ordinary income ($0.50 x 2M shares), and you could face a tax bill of over $400,000, payable in cash, even though you haven't sold a single share. This is a founder-killing tax bomb.
The 30-Day Deadline: No Exceptions
This is the most critical part. You must file your 83(b) election with the IRS within 30 calendar days of the date you receive your stock.
The Clock Starts on the Grant Date: The date the board approves the stock issuance is Day 1.
There are NO extensions and NO exceptions. If your filing is postmarked on Day 31, it is invalid. The IRS is notoriously unforgiving on this deadline.
Your startup lawyer will prepare this form for you as part of the incorporation package. It is your personal responsibility to sign it and mail it via certified mail, return receipt requested, to the IRS immediately. It is the single most important piece of mail you will ever send as a founder.
Disclaimer: This post is for general informational purposes only and does not constitute legal, tax, or financial advice. Reading or relying on this content does not create an attorney–client relationship. Every startup’s situation is unique, and you should consult qualified legal or tax professionals before making decisions that may affect your business.