Growth Company & Startup Guide To Stock Vesting / “Restricted Stock” (Section 83(b) Elections)

Founders of startups usually hold their stock subject to “vesting” (stock subject to vesting is also known as “restricted stock”), which generally raises a tax question under Section 83(b).¹ How the founder answers this tax question – and they must answer it early in their vesting period – could tremendously impact that founder’s taxes, both now and in the future, on that stock.

This article (1) discusses the general tax treatment of receiving ‘restricted stock’ (stock subject to vesting) whether for a founder, executive, board member, advisor or anyone else providing a service to the company, (2) considers the commonly discussed election under Section 83(b) (an “83(b) Election”) as well as the interplay between Section 83 and Qualified Small Business Stock (or QSBS), and (3) lays out detailed examples of how (not) making a Section 83(b) Election could play out over the several years following receipt of restricted stock. For more on QSBS, see Edward Zimmerman and Brian Silikovitz, “Gimme Shelter: VC-Backed M&A Tax Strategies For QSBS/1202,” Forbes (July 18, 2016, we refer to this article as the “Zimmerman/Silikovitz QSBS Article”).