Making Life Better For Founders With Respect To Section 83(b) Elections (Installment 1)

There has been quite a bit of great press lately on “Startup America“, President Obama’s new initiative. You can follow the initiative on Twitter at @startupamerica. And you can also go to the site and sign up to volunteer, stay informed, etc. I am hoping many good and positive changes in the legal landscape come out of this initiative. I have blogged before about the numerous suggestions I have about how to make life better for startups, and through the Startup America web site, I’ve also submitted those ideas. It would be great to get some buy in on these ideas from the folks running this initiative.

One of the ways I’ve suggested making life better for founders is to “reverse the presumption on Section 83(b) elections.”

If you are not familiar with Section 83(b) elections, they are a pain because they have to be filed within 30 days of a startup founder receiving shares which are subject to an at-cost repurchase right lapsing over a vesting period (reverse vesting). There is no extension available, or any easy cure for missing the 30 day filing deadline. In my opinion, the default rule ought to be–you are deemed to have made the election unless you elect out. The entire process for making Section 83(b) elections amounts to a trap for the unwary, and creates unnecessary work for founders and their legal and/or tax advisors.

To that end, I have drafted the proposed legislative language to amend Section 83(b) of the Internal Revenue Code. Perhaps someone at Startup America will pick this up and run with this.

Section 83(b) of the Internal Revenue Code of 1986, as amended, is hereby amended by adding a new paragraph (3) as follows:

(3) Deemed Election

An election under paragraph (1) with respect to any transfer of property shall be deemed made by any person who has paid the fair market value of such property at the time of transfer (determined without regard to any restriction other than a restriction which by its terms will never lapse), unless the person elects (in such manner as the Secretary prescribes) not to include in his or her gross income for the taxable year in which such property is transferred the excess of—

(A) the fair market value of such property at the time of transfer (determined without regard to any restriction other than a restriction which by its terms will never lapse), over

(B) the amount (if any) paid for such property.

About Joe Wallin

Joe Wallin focuses on emerging, high growth, and startup companies. Joe frequently represents companies in angel and venture financings, mergers and acquisitions, and other significant business transactions. Joe also represents investors in U.S. businesses, and provides general counsel services for companies from startup to post-public.
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  • Ehren Brav

    Agree – this is one of those “Gotchas” in the law that really lacks any basis in policy (at least from my perspective). What’s special about 30 days?

    • Anonymous

      Thanks Ehren. I agree that there is no logic to a 30 day deadline.

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  • Frank

    Joe, that’s a great idea. Another remedy is to extend the window to file to when you file your next tax return. The election is filed with (or as part of) the tax return for that year. Having a K1 will make the need to do this obvious.

    BTW, it’s not only a burden on founders, it’s a burden on anyone who vests stock as they perform services for a company. This can especially be a problem for young employees that may vest stock as part of their compensation. They won’t typically have benefit of a tax attorney when they receive their grant and may miss the window.

    • http://www.dwt.com/People/JosephMWallin Joe Wallin

      Thanks Frank. I agree with you that there are a number of ways this onerous provision could be fixed to make life better for not just founders but anyone who falls in this box. Thanks for the comment. Now we just need to press the Startup America folks to advocate for this!

  • Andy Henders

    Joe–interesting take on the modifications to Section 83(b). I’m sure many of us feel the same way, as this assumption would drastically decrease stress over filing our 83(b). The feasibility of the proposed change is questionable considering the fact that there will always be someone who claimed not to know after his or her stock did not vest. Though it would likely be great for most, the amendment may cause more confusion than the present. For now, my best advice for anyone looking to get rid of this pain as quickly as possible is to hand it over to a filing service for a small fee. Your gains from this are more than likely to cover the nominal (anywhere from $30-$50) fee that you would incur. For me, it was as simple as a search for one of these companies. I most recently went with 83belection.com (near the deadline, in fact) and had no issues filing in time. Call me lazy, but I can hardly trust myself with such deadlines. Oh well, hopefully this blog will catch someone’s eye soon and this will be the least of our worries.

    • http://www.dwt.com/People/JosephMWallin Joe Wallin

      Andy, yeah, it just seems like bad law to set up a very short deadline–30 days–with no opportunity to cure. We pay a lot for our Congress, and they should make better law.

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