4 ms·

I thought 83(b) only helps with RSU grants? For ISO grants I thought you can't do an 83(b) election? Can anyone clarify?

inmygarage 13y ago
While I am not a lawyer, this is a cut and paste from an email from our lawyers: "83(b)s are only for restricted stock." It is my understanding that you don't file an 83(b) for ISOs or any other type of options, only for actual restricted stock.
ChuckMcM 13y ago
That is correct. The 83(b) declaration is only valid for 'restricted stock' which is stock that is granted to you rather than as an option to buy. In those situations you acquire the 'right' to the stock over time (this is called vesting). And when you vest stock the IRS treats it like income and it gets added to your W2 as such. The 83(b) election allows you to take the entire tax hit immediately even though you don't have the ownership rights on the stock yet. You need to come up with the tax payment but since you "own" the stock even when it vests you won't pay additional taxes, and your ownership starts the clock on long term gains (vs short term gains). If the stock is going up an 83b can save you some money, if it is going down it makes it more complicated (you can write off up to $3,000 of "loss" per year of stock which is worth less than the 83b election price. I got to do that for just over 10 years on my dot com era 83b stock election. Generally places like Facebook or Google will sell some of your RSUs as they vest to cover the tax hit so its pretty invisible to you.
- DanielRibeiro 13y ago
  Note that there are a few alternatives to this. Fred Wilson, from Union Square Ventures (who pg wrote about it here[1]), gave a 1 hour class on the subject[2]. He covered tax and mechanisms to avoid taking unecessary invetment gains tax. Another great post on this subject (which may be a bit dated nowadays) was this one[3]. Hacker News startup lawyer had also some great comments on its corresponding HN thread[4]. Note that it embeds the Introduction to Stock Options[5] that also had an amazing discussion on HN a few years ago[6] [1] http://www.paulgraham.com/airbnb.html http://www.paulgraham.com/airbnb.html [2] http://www.avc.com/a_vc/2012/04/mba-mondays-live-employee-equity-archive-and-feedback.html http://www.avc.com/a_vc/2012/04/mba-mondays-live-employee-eq... [3] http://gigaom.com/2011/06/05/5-mistakes-you-cant-afford-to-make-with-stock-options/ http://gigaom.com/2011/06/05/5-mistakes-you-cant-afford-to-m... [4] https://news.ycombinator.com/item?id=2623182 https://news.ycombinator.com/item?id=2623182 [5] http://www.scribd.com/doc/55945011/An-Introduction-to-Stock-Options-for-the-Tech-Entrepreneur-or-Startup-Employee http://www.scribd.com/doc/55945011/An-Introduction-to-Stock-... [6] https://news.ycombinator.com/item?id=3252290 https://news.ycombinator.com/item?id=3252290
jsmthrowaway 13y ago
An 83(b) election is for restricted stock only. Meaning the company pays you in actual equity (vesting notwithstanding). Restricted stock, notably, is not the same as an RSU (Google's "GSU"); one of the reasons an RSU exists is to simplify taxes, and because you are not issued stock at the time of grant there is no 83(b) election for RSUs. Think of restricted stock as a chunk of equity set aside for you that you gradually vest rights upon. RSUs, on the other hand, are a promise to give you equity on a similar vesting schedule but the equity is not set aside. The effect on the valuation of the security with regard to your taxes in both scenarios should be self-evident.
- jzieger2 13y ago
  The technical requirement of the rule is that the stock is (a) subject to a substantial risk of forfeiture, and (b) not transferable. Some stock option plans have an early exercise provision, which, if used, has the effect of converting the option to stock, but subject to restrictions that meet the requirements of Sec. 83(b). Stock options that are subject to an early exercise provision would no longer qualify for ISO treatment.
  - hundt 13y ago
    "Stock options that are subject to an early exercise provision would no longer qualify for ISO treatment." Not sure exactly what you mean by this, but I believe the same ISO rules apply if you exercise early: you don't owe taxes (under the normal income tax calculation; AMT is different for ISOs) until you actually sell the shares.
hundt 13y ago
If your stock option plan allows you to "early exercise" (exercise before the options vest--this gives you restricted shares that vest on the same schedule as the options you exercised) then you can file an 83(b) for those restricted shares. Edit: I should add that this only matters for AMT purposes. If you early-exercise ISOs then the 83(b) election doesn't change anything for regular income tax, but does effectively accelerate your AMT income.
SeoxyS 13y ago
That is actually incorrect. Many here have replied that only 83(b) elections only pertain to RSUs. In fact, it also applies to early-exercised ISOs; when you buy the shares before they actually vest. Source: I've done this. I've early exercised ISOs and filed an 83(b).

inmygarage 13y ago

While I am not a lawyer, this is a cut and paste from an email from our lawyers: "83(b)s are only for restricted stock." It is my understanding that you don't file an 83(b) for ISOs or any other type of options, only for actual restricted stock.

ChuckMcM 13y ago

That is correct. The 83(b) declaration is only valid for 'restricted stock' which is stock that is granted to you rather than as an option to buy. In those situations you acquire the 'right' to the stock over time (this is called vesting). And when you vest stock the IRS treats it like income and it gets added to your W2 as such. The 83(b) election allows you to take the entire tax hit immediately even though you don't have the ownership rights on the stock yet. You need to come up with the tax payment but since you "own" the stock even when it vests you won't pay additional taxes, and your ownership starts the clock on long term gains (vs short term gains). If the stock is going up an 83b can save you some money, if it is going down it makes it more complicated (you can write off up to $3,000 of "loss" per year of stock which is worth less than the 83b election price. I got to do that for just over 10 years on my dot com era 83b stock election. Generally places like Facebook or Google will sell some of your RSUs as they vest to cover the tax hit so its pretty invisible to you.

DanielRibeiro 13y ago
Note that there are a few alternatives to this. Fred Wilson, from Union Square Ventures (who pg wrote about it here[1]), gave a 1 hour class on the subject[2]. He covered tax and mechanisms to avoid taking unecessary invetment gains tax. Another great post on this subject (which may be a bit dated nowadays) was this one[3]. Hacker News startup lawyer had also some great comments on its corresponding HN thread[4]. Note that it embeds the Introduction to Stock Options[5] that also had an amazing discussion on HN a few years ago[6] [1] http://www.paulgraham.com/airbnb.html http://www.paulgraham.com/airbnb.html [2] http://www.avc.com/a_vc/2012/04/mba-mondays-live-employee-equity-archive-and-feedback.html http://www.avc.com/a_vc/2012/04/mba-mondays-live-employee-eq... [3] http://gigaom.com/2011/06/05/5-mistakes-you-cant-afford-to-make-with-stock-options/ http://gigaom.com/2011/06/05/5-mistakes-you-cant-afford-to-m... [4] https://news.ycombinator.com/item?id=2623182 https://news.ycombinator.com/item?id=2623182 [5] http://www.scribd.com/doc/55945011/An-Introduction-to-Stock-Options-for-the-Tech-Entrepreneur-or-Startup-Employee http://www.scribd.com/doc/55945011/An-Introduction-to-Stock-... [6] https://news.ycombinator.com/item?id=3252290 https://news.ycombinator.com/item?id=3252290

jsmthrowaway 13y ago

An 83(b) election is for restricted stock only. Meaning the company pays you in actual equity (vesting notwithstanding). Restricted stock, notably, is not the same as an RSU (Google's "GSU"); one of the reasons an RSU exists is to simplify taxes, and because you are not issued stock at the time of grant there is no 83(b) election for RSUs. Think of restricted stock as a chunk of equity set aside for you that you gradually vest rights upon. RSUs, on the other hand, are a promise to give you equity on a similar vesting schedule but the equity is not set aside. The effect on the valuation of the security with regard to your taxes in both scenarios should be self-evident.

jzieger2 13y ago
The technical requirement of the rule is that the stock is (a) subject to a substantial risk of forfeiture, and (b) not transferable. Some stock option plans have an early exercise provision, which, if used, has the effect of converting the option to stock, but subject to restrictions that meet the requirements of Sec. 83(b). Stock options that are subject to an early exercise provision would no longer qualify for ISO treatment.
- hundt 13y ago
  "Stock options that are subject to an early exercise provision would no longer qualify for ISO treatment." Not sure exactly what you mean by this, but I believe the same ISO rules apply if you exercise early: you don't owe taxes (under the normal income tax calculation; AMT is different for ISOs) until you actually sell the shares.

hundt 13y ago

If your stock option plan allows you to "early exercise" (exercise before the options vest--this gives you restricted shares that vest on the same schedule as the options you exercised) then you can file an 83(b) for those restricted shares. Edit: I should add that this only matters for AMT purposes. If you early-exercise ISOs then the 83(b) election doesn't change anything for regular income tax, but does effectively accelerate your AMT income.

SeoxyS 13y ago

That is actually incorrect. Many here have replied that only 83(b) elections only pertain to RSUs. In fact, it also applies to early-exercised ISOs; when you buy the shares before they actually vest. Source: I've done this. I've early exercised ISOs and filed an 83(b).