Summary for Founders:
- A Section 83(b) election generally moves tax timing to the grant date instead of taxing you as shares vest.
- You have 30 days from the grant date to file with the Internal Revenue Service (“IRS”) and missing it is effectively irreversible.
- When fair market value (“FMV”) is low, filing can reduce ordinary income and shift more upside into capital gain treatment if you later sell.
- If the company fails or you forfeit unvested shares after leaving, taxes paid based on grant-date FMV are not refunded.
- Because the outcome depends on your equity type and documentation, founders often speak with a legal counselor early to align the grant and the filing.
Why the Section 83(b) Election Is an Early Equity Decision
In the early stages of most life sciences and other technology companies, momentum is driven by ideas that have future commercial value rather than immediate cash returns. That value may sit in:
- Proprietary research
- Early platform development
- Defensible intellectual property
- A regulatory pathway that has not yet matured
Because revenue is often distant, founders are typically compensated with equity rather than salary. That equity may take the form of a restricted stock grant, early-exercised options, a profits interest or another form of equity compensation, depending on the type of business entity and how the company is structured.
Once equity is issued, tax consequences follow.
Under the default rule in the Internal Revenue Code (“IRC”), property subject to vesting is taxed as it vests, based on its fair market value at each vesting date. As a result, you may be required to pay ordinary income tax as your shares vest, even if you have not received cash.
The Section 83(b) election for founders changes that timing, resulting in significant tax savings for you if the company succeeds, but only if the underlying assumptions hold.
This article explains how the Section 83(b) election works and why it matters to you as a founder when making early equity decisions.
Dates and Terms That Control a Section 83(b) Election
Before you decide whether to file an 83(b) election, you need to know exactly which dates start the clock and which terms determine when your equity becomes taxable.
- Restricted stock
Restricted stock is company stock that you can lose if certain conditions are not met, most often continued service over time. This substantial risk of forfeiture is what makes Section 83 relevant in the first place.
- Substantial risk of forfeiture
This refers to the possibility that your equity can be forfeited if you leave the company or fail to satisfy vesting conditions. If no such risk exists, a Section 83(b) election does not apply because the equity is already taxable at grant under the default rules.
- Grant date
This is the date you actually receive the equity from the company. For restricted stock, it is usually the date the shares are issued to you in exchange for a purchase price, even if that amount is nominal. The grant date sets the clock for everything that follows.
- 30-day filing window
From the grant date, you have exactly 30 days to file an 83(b) election with the Internal Revenue Service (“IRS”). There is no extension and no correction if you miss the deadline. If the election is not filed within that window, it is treated as if it never existed.
- Fair market value (“FMV”)
FMV is the value of the company’s stock at a specific point in time. Early in a company’s life, that value is often very low. As the business develops, the fair market value can increase quickly, which is what drives higher taxable income if no election is made.
- Vesting date and vesting schedule
These are the dates on which your shares vest and become nonforfeitable. Without an 83(b) election, each vesting date triggers ordinary income tax based on the stock’s value at that time. With the election in place, vesting still matters for ownership, but it no longer drives tax timing.
- Holding period
The holding period determines when capital gains rates apply if the stock is later sold. When an 83(b) election is filed, the holding period generally begins on the grant date rather than the vesting date, which can matter years later.
- Ordinary income tax and capital gains tax
Ordinary income tax applies to compensation income and is generally taxed at higher rates. Capital gains tax applies to the sale of assets held over time. The core function of the 83(b) election is to move future appreciation out of ordinary income and into capital gains treatment, assuming the stock is eventually sold and the election is valid.
Taken together, these terms and dates define the real mechanics of a Section 83(b) election. Understanding how they interact puts you in a far better position to evaluate whether filing the election aligns with your equity structure, your risk tolerance and your expectations for the company’s future value.
What Is a Section 83(b) Election?
Because of how life sciences and other technology companies are built, you are often compensated with an ownership interest rather than cash. That ownership interest is not fully yours on day one. It is typically structured so you can lose it if you stop providing services to the company.
That risk of losing the equity is referred to as a substantial risk of forfeiture. It is the feature that brings your equity under Section 83 of the IRC and makes a Section 83(b) election relevant in the first place. In practice, this equity almost never becomes yours immediately. It vests over time, meaning ownership becomes fixed only after certain conditions are met, such as:
- Continued service for a defined period
- Achievement of specified performance benchmarks
- The company reaching a defined operational or financing milestone
- A combination of service and company-level conditions
Under the default tax rule, you pay tax as your shares vest. Each vesting date is treated as if the company paid you compensation equal to the FMV of the shares that vested on that date. That amount is taxed as ordinary income, at ordinary income tax rates. You owe that tax whether or not you have any liquidity at the time.
If your company’s value increases significantly between the grant date and the vesting dates, the tax bill can grow quickly even though the value exists only on paper.
A Section 83(b) election allows you to opt out of that timing if you act promptly. Instead of being taxed as shares vest, you choose to be taxed at the grant date, when the FMV is often a nominal amount because the company is still at an early stage. If the underlying assumptions hold and the stock is later sold, paying tax upfront can shift future appreciation out of ordinary income and into capital gain treatment.
Why Is Section 83(b) Important for Founders?
| What changes | Why it matters to you |
| Taxes are due as shares vest | You may owe ordinary income tax before you have any liquidity |
| Company value increases early | Your tax bill can rise even though the value exists only on paper |
| A Section 83(b) election is filed | Taxes are based on early FMV instead of later growth |
| Election is missed | You are locked into higher ordinary income tax as shares vest |
Practical Risks Founders Should Weigh Before Filing a Section 83(b) Election
This election is not without tradeoffs. Filing a Section 83(b) election carries practical downside risk that founders should understand before taking action.
- If the company never succeeds
When you file a Section 83(b) election, you pay taxes based on the FMV of the equity at the grant date. If the company later shuts down, fails to reach liquidity or never produces real economic value, those taxes are not refunded. From the IRS’s perspective, you voluntarily recognized income early and the later outcome of the business does not change that result. This matters in life sciences and other technology companies, where long development cycles and high failure rates are common.
- If you leave before your equity vests
Vesting protects the company, not your tax position. By filing a Section 83(b) election, you are taxed as if you own the shares outright, even though they remain subject to forfeiture. If you leave the company and forfeit unvested shares, the taxes you paid at grant cannot be recovered. The election deliberately ignores vesting for tax timing purposes, which is both its benefit and its risk.
- If future value never materializes
The election accelerates income recognition without regard to whether the equity ever produces a gain. You are paying taxes upfront based on an assumption about future value. If that value does not materialize, the tax cost remains real even though the economic gain does not occur.
For founders, these tradeoffs make this a risk allocation decision rather than a procedural step, one that should be evaluated alongside your role, your expected timeline with the company and your tolerance for uncertainty.
How to File a Section 83(b) Election
Filing a Section 83(b) election is procedurally straightforward, but the consequences of getting it wrong are not. The filing must be done correctly, on time and in coordination with how your equity was issued. Even small errors can eliminate the intended tax treatment.
At a high level, filing the election requires you to take affirmative steps within a very narrow window:
- Prepare a written Section 83(b) election statement
- File it with the IRS within 30 days of the grant date
- Ensure the information in the election matches the underlying equity documents
- Retain proof that the election was timely filed
A copy must be provided to the company for its records. If the election is late, incomplete or inconsistent with the equity documentation, it is treated as invalid.
Why Legal Counseling Matters
Whether a Section 83(b) election is available at all depends on how your equity was structured. Stock, unexercised options, early-exercised options and profits interests are treated differently under Federal tax law.
A legal counselor helps confirm that:
- The election applies to the specific equity you received
- The grant documentation supports the intended tax treatment
- The filing aligns with the company’s capitalization and governance records
Legal counseling also matters before anything is filed. Because the election is binding and irreversible, it should be evaluated in light of vesting terms, expected timelines, valuation assumptions and your ongoing role in the company.
Contact Crowley Law LLC
At Crowley Law LLC, we have many years of experience advising founders in life sciences and other technology companies on early-stage equity decisions, including how Section 83(b) elections interact with vesting terms, valuation timing and long-term company plans.
We help you weigh both the potential tax benefits and the real downside risk before a filing is made, so the decision reflects the company’s structure and your expectations, rather than assumptions made under time pressure.
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FAQ
| Question | Answer |
| Is Filing a Section 83(b) Election Optional or Is It Something Founders Are Expected to Do? | It is optional under the IRC, but it is widely treated as a standard step for founders receiving restricted stock in early-stage companies. The real question is not whether the election is permitted. It is whether the default tax treatment works against your expected upside. |
| What Actually Happens if I Do Nothing and Skip the 83(b) Election? | If no election is filed, each vesting event increases the income reported based on the fair market value on the vesting date. In a growing company, this can result in a higher tax liability years before any shares can be sold. |
| Does Filing an 83(b) Election Mean I Will Owe Taxes Immediately? | Yes, but for early-stage founder equity, the taxable amount is often minimal because FMV is typically low at the time of transfer. The election accelerates tax timing. It does not create value that was not already present. |
| Does an 83(b) Election Affect Investors or the Company’s Cap Table? | The election is personal to the founder, but investors often look for it during diligence. Missing elections can raise questions about tax exposure, documentation discipline and whether ordinary income tax may apply as shares vest. |