83(b) Elections – Avoid a Surprise Tax Bill on Your Founder Stock

This write-up was originally sent to subscribers as a part of our Mission Control weekly insights, a series where we share wisdom and quick breakdowns on topics from our entrepreneur support network.

Last week, we covered why vesting schedules are essential for protecting your company and aligning incentives among founders and early team members. But vesting also comes with a tax wrinkle that can catch founders off guard: by default, the IRS taxes your stock as it vests—potentially creating a massive tax burden down the road.

Fortunately, there’s a simple way to avoid this problem: filing an 83(b) election. Here’s how it works and why it matters:

Filing an 83(b) election let’s you handle the tax upfront when things are cheap to save you from big tax headaches later. This is your personal income tax responsibility—the company can’t do it for you. The deadline to file is 30 days after the stock grant date. Make sure you (and your co-founders) understand this; it’s one of the important early tax moves you’ll make as a founder.

By default, the IRS considers each vesting date (the cliff and each month after) a taxable event. This means every time more of your stock vests, you’ll owe income tax based on its value at that time. Early on your shares are worth so little it is a negligible event. However, if your company is growing quickly in years two, three, and beyond, that could mean paying taxes on hundreds of thousands (or even millions) of dollars of paper gains before you’ve sold a single share to actually realize them.

That’s where the 83(b) election comes in.

By filing this fairly simple form within 30 days of your stock grant, you tell the IRS to tax you now, at the stock’s current low value, rather than later when it’s worth much more. This locks in a lower tax liability (usually zero if you’ve paid the nominal amount for your shares) and avoids surprise tax bills as your stock vests over time.

Why does the IRS allow this? By filing the 83(b) you’re also giving up the ability to take losses if the shares drop below their initial value. However, since most founder’s shares are granted very early in the company’s life at a low value ($0.00001 for Gust Launch companies), there’s very little potential loss to take.

Filing your 83(b) elections is almost always the right move for founders and early team members of startups built for growth. Make sure you handle yours—and be a good steward to anyone you grant common stock to by ensuring they know to file theirs, too.

Dodge this and other bullets

Missing an 83(b) election can create significant tax headaches for founders and potentially misalign incentives across your team. Unfortunately, it’s just one of many technical corporate governance issues that can catch early-stage founders off guard.

At Gust, we regularly see promising startups stumble during fundraising due to preventable corporate structure issues. From improper entity formation and missing governance documents to intellectual property ownership questions and equity misalignment – these “easy no’s” can kill promising deals and waste time.

That’s why we built our new Corporate Diligence Report tool. By answering a few straightforward questions about your startup’s structure, you’ll receive a comprehensive assessment that identifies potential red flags before they become deal-breakers with investors. Give it a try, it’s free, takes just minutes to complete, and could stop your next funding round from stalling out.