You, Mr. or Ms. Startup Founder, have already learned that you need to vest founders’ stock and you’ve learned that you need to decide now just how much ownership each founder is going to have in your new company. You’ve also gained an understanding of how the vesting is implemented and a standard vesting schedule.
We know there are two things that are certain in life: death and taxes. Although death is not a completely irrelevant topic in regards to vesting founders’ stock in your startup, taxes are more relevant at this point.
The default way that founders’ stock is treated by the IRS can lead to really bad tax consequences for the individual founders if a certain election is not made with the IRS at the time the initial stock grant is made. This election is called a Section 83(b) election. The effect of this election, when made, is that the IRS will treat the entire grant of stock as being complete at the time of the initial grant at the value of the stock at that time. The founder would realize income at that time, instead of the alternative, that being a taxable income event each time a portion of stock vests.
It’s a simple election, and it must be made within 30 days of the initial stock grant.
This concludes my five-part series on vesting schedules in a startup.
