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Glossary 83(b) Election

An 83(b) election is a way for startup founders with shares subject to vesting to elect to pay taxes on their shares before they vest. This is a significant potential benefit because stock subject to vesting is ordinarily taxed as ordinary income when it vests. If the value of the stock is increasing as the stock vests, which, if the startup is successful, will be the case, then there can be a corresponding increase in taxes owed by the founder. But the stock will be illiquid at that point, meaning the founder could have a large tax bill but no liquidity to cover. An 83(b) election solves this by accelerating income taxes to be due when the shares are purchased. Because the shares will be granted at a nominal value, the taxes due, if any, will be negligible.

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