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The way it works for founders is that you get actual stock, and vesting is implemented with a repurchase right. The IRS considers the stock to be an "asset at r

The way it works for founders is that you get actual stock, and vesting is implemented with a repurchase right. The IRS considers the stock to be an "asset at risk", meaning that you don't actually realize the value as income until the repurchase right goes away. Because this happens over time, it practically means founder stock is, by default, treated as being earned every month. This is no big deal in the beginning, but if you change the valuation of the company, suddenly each monthly stock grant has a discrepancy between what you paid for it and what it's worth. Therefore, it's income, therefore, you owe taxes on it. The way to fix this is an 83(b) election, which lets you say, "No, I'm taking the risk of this all up front. I want to pay taxes on it, even though the asset is at risk." In this specific case, it's a no-brainer: there are no taxes today, so of course I'll pay that $0. If you want to do this with employee options, you have to set up early exercise rights. I think early exercise is done via 83(b) for employees, but I'm not 100% on that. My company isn't big enough that we've had to cross that bridge :)

toast0 11y ago
> If you want to do this with employee options, you have to set up early exercise rights. I think early exercise is done via 83(b) for employees, but I'm not 100% on that. Yes, if you early exercise ISOs, you would want to file an 83(b) to pay the $0 ordinary income tax burden up front (and get long term capital gains later). I'm not sure if you can file an 83(b) on an NSO.
- GauntletWizard 11y ago
  It sounds like an incredibly complicated process to get to "These options are no longer options, they are stock with basis zero"; Am I correct?
  - toast0 11y ago
    It's a little complicated, but it can be very helpful. The basis isn't zero either, it's what you paid to exercise the option. The tax due at time of exercise is $0 because the fair market value is the same as what you paid (assuming you exercise either at the time of the grant, or at least before the next evaluation of the FMV). The benefit is if/when you sell, if you've held everything for the right period, you can pay long term capital gains tax on the gain, instead of ordinary income like you would if you held onto the option as an option.
- gkop 11y ago
  Yes, you can file an 83(b) when early exercising NSOs. In fact, some lawyers may advise you to take NSOs over ISOs for the portion of the grant you early exercise.
- brianwawok 11y ago
  Is $0 legal? I thought normally you gave the stock 1 billionth of a penny of value and paid your $1 in tax.
  - SeoxyS 11y ago
    It's legal, not because the stock has no value, but because the spread (i.e. the difference) between the strike price of the option (e.g. $0.01/option) and the stock's value (e.g. $0.01/share) is $0. That's the profit, so that's what you pay tax on.

toast0 11y ago

> If you want to do this with employee options, you have to set up early exercise rights. I think early exercise is done via 83(b) for employees, but I'm not 100% on that. Yes, if you early exercise ISOs, you would want to file an 83(b) to pay the $0 ordinary income tax burden up front (and get long term capital gains later). I'm not sure if you can file an 83(b) on an NSO.

GauntletWizard 11y ago
It sounds like an incredibly complicated process to get to "These options are no longer options, they are stock with basis zero"; Am I correct?
- toast0 11y ago
  It's a little complicated, but it can be very helpful. The basis isn't zero either, it's what you paid to exercise the option. The tax due at time of exercise is $0 because the fair market value is the same as what you paid (assuming you exercise either at the time of the grant, or at least before the next evaluation of the FMV). The benefit is if/when you sell, if you've held everything for the right period, you can pay long term capital gains tax on the gain, instead of ordinary income like you would if you held onto the option as an option.
gkop 11y ago
Yes, you can file an 83(b) when early exercising NSOs. In fact, some lawyers may advise you to take NSOs over ISOs for the portion of the grant you early exercise.
brianwawok 11y ago
Is $0 legal? I thought normally you gave the stock 1 billionth of a penny of value and paid your $1 in tax.
- SeoxyS 11y ago
  It's legal, not because the stock has no value, but because the spread (i.e. the difference) between the strike price of the option (e.g. $0.01/option) and the stock's value (e.g. $0.01/share) is $0. That's the profit, so that's what you pay tax on.