When you incorporate a new C-Corp, the founders issue themselves common stock. Two decisions made at issuance can save (or cost) founders meaningful money and ownership: whether to vest the stock, and whether to file a Section 83(b) election with the IRS.
Get both right, and the company has clean equity that protects co-founders against each other and is tax-efficient. Get either wrong, and you face years of complications.
Founder vesting: why you should
Vesting means the founder earns the right to keep stock over time. Without vesting, a founder owns 100% of their grant on day one. With standard 4-year vesting and a 1-year cliff:
- If the founder leaves in the first 12 months, they forfeit all stock.
- At the 12-month mark, 25% of the grant vests.
- The remaining 75% vests monthly over the next 36 months.
Vesting protects co-founders against each other
Imagine three founders, equal 33% splits, no vesting. One quits after six months. That founder keeps 33% of the company forever, with no continuing contribution. The remaining founders carry the load while the absent founder owns a third of the upside.
With vesting, the leaving founder's unvested stock returns to the company. The remaining founders' percentages effectively grow (mathematically the same shares, but a smaller denominator).
Vesting protects the company against future investors
Any investor in a priced round will require founder vesting. If the company is founded without vesting, the first thing the investor's term sheet does is impose vesting (sometimes called "double-trigger vesting" or just "vesting"). This becomes a negotiation issue with founders who already think they fully own their stock.
Starting with vesting from incorporation avoids this. It is the standard, expected practice in venture-backed companies.
Acceleration provisions
Most founder vesting includes acceleration provisions that release some or all unvested stock on certain events:
- Single-trigger acceleration on change of control. If the company is acquired, all unvested stock vests immediately. Common but not universal.
- Double-trigger acceleration. Unvested stock vests if the company is acquired AND the founder is terminated without cause within a window (usually 12 months). This is more common in modern term sheets because it protects founders without giving them an automatic exit at acquisition.
- Acceleration on termination without cause. If the founder is fired without cause, some or all unvested stock vests immediately. Negotiated case by case.
The 83(b) election: what it does
Under IRS rules, restricted stock (stock subject to vesting) is taxable to the recipient as it vests, at the fair market value on the vesting date. For a founder whose stock is worth $0.0001 per share at incorporation but $10 per share at year 4, this can mean significant taxable income each year as stock vests.
The Section 83(b) election lets the founder elect to be taxed at the time of grant on the full grant value, rather than as it vests. For a typical founder grant where the stock is worth a fraction of a cent at incorporation, the 83(b) election makes the tax bill essentially zero.
The math, with numbers
Founder is granted 5,000,000 shares of common stock at $0.0001 per share. Total grant value: $500.
Without 83(b):
- Year 1: 1,250,000 shares vest. If shares are now worth $0.50 (after a seed round), taxable income = $625,000.
- Year 2: 1,250,000 shares vest at, say, $2 per share. Taxable income = $2,500,000.
- Year 3: at $4 per share, taxable income = $5,000,000.
- Year 4: at $8 per share, taxable income = $10,000,000.
With 83(b):
- Day 1: Founder elects to recognize $500 of income (the full grant value).
- Year 1, 2, 3, 4: No taxable event from vesting. The founder owes nothing.
The total difference, in the example above, is over $4 million in ordinary income tax (or more, depending on the founder's tax bracket).
The 83(b) election only works when the stock value at grant is low. For founders incorporating a new company at $0 in value, the election is essentially free. For an employee receiving restricted stock years later, when the company is worth $50M, an 83(b) election creates an immediate $50M tax bill on stock they have not even earned yet.
The 30-day deadline
The 83(b) election must be filed with the IRS within 30 calendar days of the stock grant date. Day 1 is the grant date. Day 30 is the deadline. After day 30, the election is irrevocably unavailable.
This is one of the most-missed deadlines in startup formation. Founders incorporate, get busy, and remember the 83(b) on day 35. There is no extension; there is no waiver.
How to file
What you need
- Founder name, address, and Social Security Number.
- Description of the stock granted (number of shares, type, restrictions).
- The fair market value at the time of grant.
- The amount paid for the stock (usually $0 to $500 for founders).
- Signature of the founder.
How to send
The 83(b) election is mailed to the IRS Service Center where you file your personal tax return. The IRS recommends certified mail with return receipt because there is no online filing for 83(b) elections.
Keep the certified mail receipt forever. The IRS sometimes loses 83(b) filings, and the receipt is your only proof.
Copies to keep
- One original copy to the IRS.
- One copy attached to the founder's federal tax return for that year.
- One copy in the company records.
- One copy in the founder's personal records.
The most common mistakes
Missing the 30-day deadline
By far the most common. The fix: have a calendar reminder, send certified mail within the first week, do not wait.
Filing without vesting
The 83(b) only matters for restricted stock. If your founder stock has no vesting, you do not need 83(b) (and filing one would not do anything).
Filing for already-vested stock
Same issue. 83(b) only applies before vesting.
Not paying for the stock
Founders typically pay a nominal amount (the par value) for their stock. Without payment, the stock issuance can be challenged. Most boards authorize $500 or so to be paid by each founder, in exchange for the millions of shares.
Mailing to the wrong IRS address
Use the address for personal tax returns in your state. The IRS publishes this list; do not guess.
How we help
When we form a Delaware C-Corp, the founder stock issuance includes restricted stock with standard 4-year/1-year-cliff vesting by default. We provide the 83(b) election form, completed except for the founder's signature, with clear instructions to mail it via certified return receipt within 30 days. We follow up with calendar reminders at day 7 and day 21.
For founders who form elsewhere or miss the deadline, our Attorney Network includes counsel who can review the situation and discuss options (which, for missed deadlines, are limited).
The takeaway
Vest your founder stock. File the 83(b) election within 30 days of grant. Send it certified mail with return receipt. Keep four copies (IRS, your tax return, company records, personal records). These two decisions, made correctly in the first 30 days of incorporation, are among the highest-use things a founder can do.