Process & paperwork
83(b) election
A US tax election, filed within 30 days of receiving restricted stock, to be taxed on its value at grant rather than as it vests — a deadline with no extensions and severe consequences for missing it.
In plain English
When a founder receives restricted stock subject to vesting, the default US tax treatment is to tax the value of each tranche as it vests. For stock granted at incorporation and worth almost nothing, the default is a disaster in waiting: each vesting event is taxed at the then-current value, so a founder whose company has become valuable faces income tax on shares they cannot sell.
The 83(b) election reverses this. By electing within 30 days of grant, the founder is taxed on the value at grant — usually a nominal amount, sometimes a few dollars in total — and all subsequent appreciation is treated as capital gain, realised only on sale. It also starts the capital-gains holding-period clock immediately, which matters for the five-year QSBS qualifying period.
The deadline is 30 days from the grant date, it is statutory, and there is no relief for missing it. Not for illness, not for a lawyer's error, not for a founder who did not know the rule existed. It is one of the harshest deadlines in US tax practice and it catches people every year.
This is not an investor election. Angels buying shares outright are not receiving restricted stock and have nothing to elect. It matters to you because it affects the founders you are backing.
What it means for your cheque
Ask, during diligence, whether every founder filed an 83(b) within 30 days of their grant and whether copies exist. It is a single question with a yes or no answer, it takes ten seconds, and a "no" means the founders are carrying a tax liability that grows with every dollar of value you help create.
The consequence for you is a founder facing a large tax bill on illiquid stock — a distraction and a genuine pressure toward early liquidity or, in the worst case, toward selling the company sooner than is optimal. It also complicates their QSBS position, which is one of the more valuable tax attributes in US startup investing.
Do the arithmetic
The cost of missing the 30-day window
A founder receives 2,000,000 shares of restricted stock at incorporation, worth $0.0001 each, vesting over four years. The company grows quickly.
| With an 83(b) election — taxable income at grant | $200, taxed once |
|---|---|
| With an 83(b) — tax on each vesting event | none |
| With an 83(b) — all appreciation | capital gain on eventual sale |
| Without the election — year 1 vesting at $0.50 per share | $250,000 of ordinary income |
| Without — year 2 vesting at $2.00 per share | $1,000,000 of ordinary income |
| Without — years 3 and 4 at higher valuations | progressively larger income, on unsellable shares |
| Cash available to pay any of it | none — the shares cannot be sold |
A $200 tax event became millions of dollars of income tax on stock that cannot be sold to pay it. The difference was a one-page form filed within 30 days.
At the table
What to negotiate
- Ask in diligence whether all founders filed, and ask to see copies. The answer should be immediate.
- Where founder stock is issued as part of your round, make filing a condition and diarise the deadline.
- Note that the election applies to restricted stock, not to options — a distinction that confuses people regularly.
- For US angels, ask separately whether the shares you are buying are QSBS-eligible, and keep records from the date of purchase.
- Recommend the founders take their own tax advice; this is not a matter for the company's corporate lawyer alone.
Around the world
How this differs by market
Applies to US taxpayers receiving restricted stock. It interacts with QSBS under Section 1202, where the five-year holding period is one of the most valuable reliefs available to US angels.
LATAMRelevant where founders of Latin American companies hold restricted stock in a Delaware parent and are US taxpayers.
EUNo direct equivalent. UK founders deal with employment-related securities rules and Section 431 elections, which serve a broadly comparable purpose by a different route.
APACRelevant to US-taxpayer founders in the region holding stock in a US parent; local restricted-stock regimes differ entirely.
83(b) election: common questions
Do I need to file an 83(b) as an angel investor?
What happens if a founder missed the deadline?
Does the election apply to stock options?
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