83(b) stock options


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The important exception to this rule has to do with early exercise of option grants. That is, sometimes when you have an option grant that vests over several years, you 8767 ll have the further option to exercise your right to purchase early. Usually when you have that option, what you end up buying by exercising early is restricted stock. That means that you buy this restricted stock, but if you quit or leave the company before your vesting date, the company pays you back for the stock and you get nothing. If you stay beyond the vesting date, the restricted stock converts to common stock.

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so, if you are a founder with stock with no vesting period, then you only pay tax when there is a liquidation event correct? No need to pay every time the stock is valued?

A second question re: options: If someone has options that vest over time, and upon exercise of those options the Company retains right of first refusal, does that impact how the IRS would treat the shares received through exercising the option? . If I exercise my option to purchase 6555 shares of a privately held company, do I have to pay the IRS anything at all if I cannot legally sell those shares without jumping through hoops?

This can all get a little confusing, so when does it make sense to take this election, when will it save you tax money? Well, one situation where it usually makes a lot of sense to take the election is where you’re a founder of a brand new company with no real value, and you’ve agreed to a multi-year vesting agreement. In such a situation, you pay tax up front on all the shares when they’re valued basically at nothing. You only pay tax again when there’s some kind of liquidation event. As long as that event comes more than a year after the grant, you’ll end up paying taxes at the long-term capital gains rate, which is a lot lower than the typical income tax rate, and you come out way ahead.

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Also, this is based on 8775 grants 8776 of equity. If the founders paid cash for their shares in the amount of the par value, their taxes owed would presumably be zero this is not highlighted in your article. Is there a reason for that?

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Very frequently though, especially with founders, any grant of equity is going to be subject to a vesting agreement. What that means is that under the default rule, you don’t pay taxes on any stock until it actually vests, and you pay taxes based upon the value of the stock at the time of vesting. As a practical matter, what this means is that if the company does really well and goes up in value over the course of the vesting agreement, you’re going to end up paying more and more taxes over the years.

That 8767 s correct, the IRS is very strict about the timeline, and if you don 8767 t make the election on time you 8767 re out of luck. For that reason, it 8767 s always important to make sure you get proof of filing. At a minimum that means sending the document certified, but you can also send the IRS a self-addressed stamped envelope and ask them to date and time stamp the filing and send you a copy back as well.


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