Great explanation Brett. Paid $80 at issue. A year later at $7M. Remembered watching this video. Ran to my Google Drive and dug up my 83b. Threw my fist into air and did something that resembled dancing. Thank you.
Awesome dude! Happy for you. I’m on week 2 of founding a company. I’m struggling for when I should nail down the legal stuff because our idea isn’t event tested yet. Thoughts on when it’s a good idea to spend the few thousand dollars to do the legal stuff?
Hi, Paul. There are things I'd need to know about your investment to help here. This question is specific advice, though, and this isn't the right forum for me to provide that. I don't think this is a tough question to give you some certainty, although I couldn't answer it without knowing more about what exactly you received as an instrument (more about your units). If you're interested, you can engage me at clarity.fm/brettcenkus on a per minute basis. There are plenty of CPAs and other people there, too, that can likely give you specific advice quickly without a large engagement, etc. and lots of dollars.
This is very well and clearly stated. If the company grows, and is sold and there's a forced distribution, are the proceeds taxed as ordinary income or at capital gains rates?
depends on whether you're initially issued options or restricted stock. If you receive shares of restricted stock, they'd be taxed at capital gains rates. Options would depend on whether or not you had previously exercised the options to get shares and held them long enough
So, if there is no vesting = there is no 83 (b) Election needed? My partners and I want to open C Corp and distribute the shares between 3 shareholders. We don't want to do vesting. Can we transfer all shares at one day with 100% rights for them and do not submit 83 (b)?
Thank you Brett! This is freaking amazing!!! I have a question...my co founder and I have been working on our company for a while, and we want to accelerate our first year cliff. Would we be alright if we just set the commencement date back a year? Thanks so much!!!
I wouldn't do that. Just grant x number of the shares (i.e., 1/4 of the total shares you are each receiving) straight up without any vesting. In other words, get rid of the first-year cliff, grant 1/4 of the shares without restrictions, and grant the remainder of the shares with, for example, vesting over three years in equal monthly installments.
@@BrettCenkus omg thank you so much we will do that! Those vested shares will still be covered on the 83b right? For some reason, the way I'm comprehending the 83b, is that it only covers 'unvested' shares...Thank you so much Brett!
All this legal stuff is confusing to me. I’m on week 2 of my business. Zero customers, just formulating our idea and initial marketing strategy. Website and server are built. First marketing funnel is built and we’re going to start lead generation in a week or so to test our idea (lean startup methodology). At what point is it time to invest the few thousand dollars into the legal stuff? Everyone says do it right away, but what exactly does that mean when we’re bootstrapping and broke? Does right away mean literally day one? Or does it mean the day you find your Minimum Viable Product? I really appreciate your content!
great question! There is no need to spend precious dollars on legal advice until 1) you have a comfortable cushion in your bank account, 2) the business is starting to show some small level of traction and you have partners/cofounders, or 3) you have a unique legal situation or risk. For most businesses, #1 and #3 happen after many months, not a couple of weeks. #2 is a tougher one to navigate. The value of a great business lawyer is not primarily in filing a certificate of formation/incorporation to create an entity. There is nothing to that. It's in helping you and other partners/cofounders think through and create a custom partnership agreement. Sounds like you're doing the right thing with your focus on figuring out your business funnel, lead gen, and getting that first customer! Stay in that lane for a while.
Brett Cenkus thanks for the advice! One quick follow up question. Should I create a simple agreement between us stating “all time spent and money contributed are considered donations to the company. You are considered a volunteer to the company and all IP developed as a volunteer is owned by the company. Monetary donation and hours volunteered will be used to help divide equity during our incorporation and founders agreement legal.” And have volunteer agreements signed, and donation receipts for money given. Or should we just go on faith until it’s time for legal?
@@11219tt check out cenkuslaw.com/partnersandfounders/back-of-a-napkin-or-stopgap-agreement/. I'm (obviously) a believer in doing something simple vs. nothing if you have co-founders and limited budget or a lot of uncertainty about where the business is going (or not going). I don't think it's critical, though, because it is a short-term measure anyway and you absolutely need to engage an attorney to help put together a formal agreement sooner than later and well before there is anything worth fighting over. An agreement like you're describing or the one I referenced are helpful, although just a little bit. It's easy to make the mistake of relying on my agreement for longer than you should.
Omar, typically a founder who makes an 83(b) election will not pay any tax when the shares are initially received or as they vest. When the founder sells them, they will pay capital gains (long term if they held the shares for greater than one year). The capital gains tax will be applied to the difference between what the founder paid (generally a negligible price, a few hundred dollars or so) and the sales price of the shares. If the shares are qualified small business stock (QSBS) and held for more than five years, there may be no (or a reduced) capital gains tax.
@@oooomar if you file the 83(b) election, the holding period starts running on the date you purchased the stock (another reason to file the 83(b) election and not one that I typically talk about!)
Hi Brett, my co-founders are non-US residents today but it is not unlikely that they will relocate in the future. I read somewhere that they can still fill and submit the form and should write "Applying For ITIN" under the taxpayer ID, does that sound right to you? Also, can I send the form (after they sign it) on their behalf, if so, should I send it to the same IRS office I'm sending my form? Thanks
Hi Brett! Great video! I do have one question that I can't seem to find anywhere. I can't find a definitive answer to the exact date for our 83b window - so I wanted to post here to help other founders as well. I'll also use 'similar' dates to we had. We incorporated March 20th, 2021 - but didn't file shares (there are two founders) until April 20th. Also (not sure if this is relevant) our check payment didn't clear untik in the bank until May 10th. Did the 30 day, 83b window START on March 20th, April 20th, or May 10th?
Patrick, the clock starts when you receive the shares, i.e., when the property was transferred. That sounds like April 20th in your case. I suppose if the stock purchase agreement/stock grant says that the shares were not issued until the company (the issuer) received cleared funds (i.e., if the agreement clearly states that process), then perhaps there is an argument for May 10th, i.e., that the shares were not technically issued, even though you may have signed documentation, until the check cleared on May 10th. You're much better off to assume April 20th is the date and proceed accordingly since arguing otherwise may be tough, regardless of the strength of your argument. I say that because I would expect any IRS examiner to be heavily influenced by the date of the documentation under which the shares were issued.
@@BrettCenkus Thank you. If I can ask one more question -- It's about the 30 day period. Does the employee have to do the 83b election within 30 days of joining the company, i.e. within 30 days of signing a contract that guarantees them options that vest over time, starting 1 year later? Or is it only when they finally are able to exercise their options? Or is it when they actually do exercise the options and therefore actually own shares? For example, if an employee finishes their first year of working (say Jan 2021 til Jan 2022), they get past the cliff, and are granted options for the entire year (followed by the tranches each month or quarter) - does the 30 day period begin in Jan 2022? And then for each tranch thereafter, is it the day they earn the option? Or is 30 days from exercising the option? Can that employee wait a year to exercise and do the 83(b) then, and pay taxes based on the strike price that was originally agreed upon when they joined the company years earlier? Hope my question is clear. And I'm sorry if I missed the answer in the video! Thanks
@@jon553 The clock starts ticking when an individual purchases (or is granted) some type of equity instrument (e.g., restricted stock, options) that vest over time. So, it's the date they first obtain that equity. It would not be 30 days from joining the company because 83(b) elections relate to equity interests, not employment per see. And it doesn't matter when the vesting starts--whether it's one year later or one day later.
Marcos, the number of shareholders/members does not affect the need for an 83(b) election, except to the extent that a sole shareholder/member does not set up their shares or LLC membership interest to vest over time. Vesting vs. not vesting is the key as to whether the 83(b) election is necessary (of value). No vesting = not necessary. Vesting = generally used. So, the first question is whether or not the sole shareholder/member should vest their shares/membership interest. In a business that doesn't intend to pursue venture capital or bring in other co-founders early-on, vesting may not make much sense. In a one-owner business that doesn't pursue VC money, I'd expect the owner to grant their shares/interest outright without vesting. In fact, that's usually what happens even in businesses where the founder expects to pursue VC money or bring on co-founders, although there is an argument to set up the shares/membership interest with vesting at the outset, in anticipation of venture capitalists or co-founders wanting to see it (the former may require it, with the latter, it may be more optics than anything, especially if the original founder retains majority control).
Cheers for video. What about say in a accelerator situation. The accelerator gives 120k for 7% of the company valuing the company at c.1.7m. Are the 93% founders taxed at this amount on day one if they make election?
nope, that's not a taxable transaction. The gains are all on paper. I'm sure there's a specific IRS Code provision to cite, although I don't know it offhand, but it's definitely not taxable to the founders (neither is any typical angel/VC/investor deal)
If the profits units are subject to vesting and have a hurdle rate (this may also be called a threshold amount, performance threshold, performance target, or a bunch of other terms) set based on the fair value of the company now (i.e., when you received the profits units), then it is likely a good move to file it.
Hi Brett, thanks for the video. I want to ask, So you have to file the 83b everytime you issue vested stock, so this includes the time after the 1 year cliff and each month as you get your monthly stock, correct?
Denzel, the recipient of the stock files the 83(b) election. You can do this one time upon receiving the 100,000 shares and you wouldn't then need to file any other 83(b) elections for those 100,000 shares (that's how you would do it if you wanted to accelerate the taxable event on the 100,000 shares to the time of receipt, not as the shares vest).
If there is tax due, you would pay it when you file your federal taxes for the year you receive the shares. Generally, though, there is no tax due. At least, the most typical use case for the 83(b) election is very early stage companies where the shares have nominal value at most.
Hi, I am a co-founder of NYC based startup. I just formed Delaware c corp in 2016 but never thought of 83B. We are 4 co-founders but the company is basically owned by me on paper. We will divide the shares later. I Have been paying tax for the franchise which all Delaware c corp suppose to pay? I am not making any penny till today. We have a monetization plan for the later time. Is it late for doing the things right?
Hasan, did you issue shares to yourself? There's a Quora Q&A on point here if you haven't issued any shares at all and the risks of that - www.quora.com/Is-it-a-problem-if-my-new-Delaware-corporation-has-been-operating-for-a-little-while-without-having-issued-any-shares-even-to-myself. If you issued shares to yourself, you missed the chance to file an 83(b) election, although your other co-founders have not. That said, if you have issued shares to yourself, since the shares are not worth anything today and they're not vesting (you said the former and the latter is implied), it's not a big deal that you didn't file an 83(b) election.
the IRS doesn't typically determine value. The way I would say it is that the IRS challenges the company's determination of value if the IRS believes it is off and the challenge matters (this IRS has something to gain). From the company's standpoint, one goal is to establish a value that is defensible in an audit. A common way to do this is with a 409A valuation, which is essentially an appraisal from a third party.
Does this only apply if you vest shares? I opened up my company by myself and stock was just issued so I own it outright. The company has been opened for 4 months and I missed the 83b deadline or does that not apply?
@@marcelfreund7302 There won't be a tax issue. VCs might want you to vest your shares, so doing that now could possibly help, although you can set up vesting later. So, no, I don't see if being any sort of turn off.
Even though you're not getting a lot of views this video, it was really helpful and I really appreciate your help and detailed explanation.
you're welcome. Glad you found it helpful!
Great explanation Brett. Paid $80 at issue. A year later at $7M. Remembered watching this video. Ran to my Google Drive and dug up my 83b. Threw my fist into air and did something that resembled dancing. Thank you.
brilliant - I'm glad that checked out well for you!
Awesome dude! Happy for you. I’m on week 2 of founding a company. I’m struggling for when I should nail down the legal stuff because our idea isn’t event tested yet. Thoughts on when it’s a good idea to spend the few thousand dollars to do the legal stuff?
@@11219tt How's it going now?
2021..still helped another person! 🙌🏼
excellent!
You explained the vesting concept perfectly in less than 2 minutes. 🙏
Brett how you explained this concept helped me with a part of my tax law masters class. Thank you. Earned a sub!!!!!
you're welcome!
Thanks a million Brett
You're welcome.
Thank you for explaining this.
Hi, Paul. There are things I'd need to know about your investment to help here. This question is specific advice, though, and this isn't the right forum for me to provide that. I don't think this is a tough question to give you some certainty, although I couldn't answer it without knowing more about what exactly you received as an instrument (more about your units). If you're interested, you can engage me at clarity.fm/brettcenkus on a per minute basis. There are plenty of CPAs and other people there, too, that can likely give you specific advice quickly without a large engagement, etc. and lots of dollars.
Nice, clear explanation, Bret. Thank you.
you're welcome. Thank you for the feedback.
Great explanations! Thanks!
You're welcome!
great video I shared this deal with me and my friends who starting businesses are on my Facebook and I have to say that you are a great teacher
thank you!
Thank you, Brett! this is one of the best videos I've watched on 83(b).
Well explained, I needed something to send to my team to explain their 83b forms, this works perfect, thanks :)
This is very well and clearly stated. If the company grows, and is sold and there's a forced distribution, are the proceeds taxed as ordinary income or at capital gains rates?
depends on whether you're initially issued options or restricted stock. If you receive shares of restricted stock, they'd be taxed at capital gains rates. Options would depend on whether or not you had previously exercised the options to get shares and held them long enough
How about foreigners do you know if they need , can , should do this?
So, if there is no vesting = there is no 83 (b) Election needed? My partners and I want to open C Corp and distribute the shares between 3 shareholders. We don't want to do vesting. Can we transfer all shares at one day with 100% rights for them and do not submit 83 (b)?
Yes.
thanks, very clear, you have a real talent
Thank you for the favorable feedback, Ben. I am glad I was able to help!
Thank you Brett! This is freaking amazing!!! I have a question...my co founder and I have been working on our company for a while, and we want to accelerate our first year cliff. Would we be alright if we just set the commencement date back a year? Thanks so much!!!
I wouldn't do that. Just grant x number of the shares (i.e., 1/4 of the total shares you are each receiving) straight up without any vesting. In other words, get rid of the first-year cliff, grant 1/4 of the shares without restrictions, and grant the remainder of the shares with, for example, vesting over three years in equal monthly installments.
@@BrettCenkus omg thank you so much we will do that! Those vested shares will still be covered on the 83b right? For some reason, the way I'm comprehending the 83b, is that it only covers 'unvested' shares...Thank you so much Brett!
All this legal stuff is confusing to me. I’m on week 2 of my business. Zero customers, just formulating our idea and initial marketing strategy. Website and server are built. First marketing funnel is built and we’re going to start lead generation in a week or so to test our idea (lean startup methodology).
At what point is it time to invest the few thousand dollars into the legal stuff?
Everyone says do it right away, but what exactly does that mean when we’re bootstrapping and broke?
Does right away mean literally day one? Or does it mean the day you find your Minimum Viable Product?
I really appreciate your content!
great question! There is no need to spend precious dollars on legal advice until 1) you have a comfortable cushion in your bank account, 2) the business is starting to show some small level of traction and you have partners/cofounders, or 3) you have a unique legal situation or risk. For most businesses, #1 and #3 happen after many months, not a couple of weeks. #2 is a tougher one to navigate. The value of a great business lawyer is not primarily in filing a certificate of formation/incorporation to create an entity. There is nothing to that. It's in helping you and other partners/cofounders think through and create a custom partnership agreement. Sounds like you're doing the right thing with your focus on figuring out your business funnel, lead gen, and getting that first customer! Stay in that lane for a while.
Brett Cenkus thanks for the advice! One quick follow up question.
Should I create a simple agreement between us stating “all time spent and money contributed are considered donations to the company. You are considered a volunteer to the company and all IP developed as a volunteer is owned by the company. Monetary donation and hours volunteered will be used to help divide equity during our incorporation and founders agreement legal.”
And have volunteer agreements signed, and donation receipts for money given.
Or should we just go on faith until it’s time for legal?
@@11219tt check out cenkuslaw.com/partnersandfounders/back-of-a-napkin-or-stopgap-agreement/. I'm (obviously) a believer in doing something simple vs. nothing if you have co-founders and limited budget or a lot of uncertainty about where the business is going (or not going). I don't think it's critical, though, because it is a short-term measure anyway and you absolutely need to engage an attorney to help put together a formal agreement sooner than later and well before there is anything worth fighting over. An agreement like you're describing or the one I referenced are helpful, although just a little bit. It's easy to make the mistake of relying on my agreement for longer than you should.
You're awesome, Brett. Thanks for this! Could you speak to the capital gains tax as it applies to the founder equity scenario you described?
Omar, typically a founder who makes an 83(b) election will not pay any tax when the shares are initially received or as they vest. When the founder sells them, they will pay capital gains (long term if they held the shares for greater than one year). The capital gains tax will be applied to the difference between what the founder paid (generally a negligible price, a few hundred dollars or so) and the sales price of the shares. If the shares are qualified small business stock (QSBS) and held for more than five years, there may be no (or a reduced) capital gains tax.
@@BrettCenkus Thanks so much! And for long-term capital gains, is it 1 year from the 83b election or from when the stock vests?
@@oooomar if you file the 83(b) election, the holding period starts running on the date you purchased the stock (another reason to file the 83(b) election and not one that I typically talk about!)
@@BrettCenkus Awesome - Thanks!
@@oooomar you're welcome!
Hi Brett, my co-founders are non-US residents today but it is not unlikely that they will relocate in the future. I read somewhere that they can still fill and submit the form and should write "Applying For ITIN" under the taxpayer ID, does that sound right to you?
Also, can I send the form (after they sign it) on their behalf, if so, should I send it to the same IRS office I'm sending my form?
Thanks
Hi Brett!
Great video! I do have one question that I can't seem to find anywhere.
I can't find a definitive answer to the exact date for our 83b window - so I wanted to post here to help other founders as well. I'll also use 'similar' dates to we had.
We incorporated March 20th, 2021 - but didn't file shares (there are two founders) until April 20th. Also (not sure if this is relevant) our check payment didn't clear untik in the bank until May 10th.
Did the 30 day, 83b window START on March 20th, April 20th, or May 10th?
Patrick, the clock starts when you receive the shares, i.e., when the property was transferred. That sounds like April 20th in your case. I suppose if the stock purchase agreement/stock grant says that the shares were not issued until the company (the issuer) received cleared funds (i.e., if the agreement clearly states that process), then perhaps there is an argument for May 10th, i.e., that the shares were not technically issued, even though you may have signed documentation, until the check cleared on May 10th. You're much better off to assume April 20th is the date and proceed accordingly since arguing otherwise may be tough, regardless of the strength of your argument. I say that because I would expect any IRS examiner to be heavily influenced by the date of the documentation under which the shares were issued.
Hey Brett. Thanks for posting this clear explanation.
Curious -- does this apply to employees receiving options over time as well?
Yes, it absolutely does if the options vest over time.
@@BrettCenkus Thank you. If I can ask one more question -- It's about the 30 day period.
Does the employee have to do the 83b election within 30 days of joining the company, i.e. within 30 days of signing a contract that guarantees them options that vest over time, starting 1 year later? Or is it only when they finally are able to exercise their options? Or is it when they actually do exercise the options and therefore actually own shares?
For example, if an employee finishes their first year of working (say Jan 2021 til Jan 2022), they get past the cliff, and are granted options for the entire year (followed by the tranches each month or quarter) - does the 30 day period begin in Jan 2022? And then for each tranch thereafter, is it the day they earn the option? Or is 30 days from exercising the option? Can that employee wait a year to exercise and do the 83(b) then, and pay taxes based on the strike price that was originally agreed upon when they joined the company years earlier?
Hope my question is clear. And I'm sorry if I missed the answer in the video!
Thanks
@@jon553 The clock starts ticking when an individual purchases (or is granted) some type of equity instrument (e.g., restricted stock, options) that vest over time. So, it's the date they first obtain that equity. It would not be 30 days from joining the company because 83(b) elections relate to equity interests, not employment per see. And it doesn't matter when the vesting starts--whether it's one year later or one day later.
Does it count as obtaining an equity if you don’t actually receive anything other than a promise that you’ll be given options after a cliff?
What if you're a single-member corporation at startup? Is there no longer a need for an 83(b)?
Marcos, the number of shareholders/members does not affect the need for an 83(b) election, except to the extent that a sole shareholder/member does not set up their shares or LLC membership interest to vest over time. Vesting vs. not vesting is the key as to whether the 83(b) election is necessary (of value). No vesting = not necessary. Vesting = generally used. So, the first question is whether or not the sole shareholder/member should vest their shares/membership interest. In a business that doesn't intend to pursue venture capital or bring in other co-founders early-on, vesting may not make much sense. In a one-owner business that doesn't pursue VC money, I'd expect the owner to grant their shares/interest outright without vesting. In fact, that's usually what happens even in businesses where the founder expects to pursue VC money or bring on co-founders, although there is an argument to set up the shares/membership interest with vesting at the outset, in anticipation of venture capitalists or co-founders wanting to see it (the former may require it, with the latter, it may be more optics than anything, especially if the original founder retains majority control).
Once your shares are vested, can a majority shareholder vote force a repurchase of your vested stock at any point?
Only if you agreed to that contractually, e.g., in a Stockholders Agreement or your original Stock Purchase Agreement.
nice
Cheers for video. What about say in a accelerator situation. The accelerator gives 120k for 7% of the company valuing the company at c.1.7m. Are the 93% founders taxed at this amount on day one if they make election?
nope, that's not a taxable transaction. The gains are all on paper. I'm sure there's a specific IRS Code provision to cite, although I don't know it offhand, but it's definitely not taxable to the founders (neither is any typical angel/VC/investor deal)
I was given profit units and should I file an 83B?
If the profits units are subject to vesting and have a hurdle rate (this may also be called a threshold amount, performance threshold, performance target, or a bunch of other terms) set based on the fair value of the company now (i.e., when you received the profits units), then it is likely a good move to file it.
Hi Brett, thanks for the video. I want to ask, So you have to file the 83b everytime you issue vested stock, so this includes the time after the 1 year cliff and each month as you get your monthly stock, correct?
Denzel, the recipient of the stock files the 83(b) election. You can do this one time upon receiving the 100,000 shares and you wouldn't then need to file any other 83(b) elections for those 100,000 shares (that's how you would do it if you wanted to accelerate the taxable event on the 100,000 shares to the time of receipt, not as the shares vest).
Thanks, Brett! Do you do a lot of tax law?
nope. We need to know our way around basic tax concepts, although you wouldn't hire Cenkus Law for a discrete tax law issue.
Do you have to pay the tax on the shares when you file the 83b form? Within 30 days? Within the year?
If there is tax due, you would pay it when you file your federal taxes for the year you receive the shares. Generally, though, there is no tax due. At least, the most typical use case for the 83(b) election is very early stage companies where the shares have nominal value at most.
Hi, I am a co-founder of NYC based startup. I just formed Delaware c corp in 2016 but never thought of 83B.
We are 4 co-founders but the company is basically owned by me on paper. We will divide the shares later. I Have been paying tax for the franchise which all Delaware c corp suppose to pay? I am not making any penny till today. We have a monetization plan for the later time. Is it late for doing the things right?
Hasan, did you issue shares to yourself? There's a Quora Q&A on point here if you haven't issued any shares at all and the risks of that - www.quora.com/Is-it-a-problem-if-my-new-Delaware-corporation-has-been-operating-for-a-little-while-without-having-issued-any-shares-even-to-myself. If you issued shares to yourself, you missed the chance to file an 83(b) election, although your other co-founders have not. That said, if you have issued shares to yourself, since the shares are not worth anything today and they're not vesting (you said the former and the latter is implied), it's not a big deal that you didn't file an 83(b) election.
How does the IRS determine the value of the company?
the IRS doesn't typically determine value. The way I would say it is that the IRS challenges the company's determination of value if the IRS believes it is off and the challenge matters (this IRS has something to gain). From the company's standpoint, one goal is to establish a value that is defensible in an audit. A common way to do this is with a 409A valuation, which is essentially an appraisal from a third party.
Does this only apply if you vest shares? I opened up my company by myself and stock was just issued so I own it outright. The company has been opened for 4 months and I missed the 83b deadline or does that not apply?
Marcel, yes, there isn't a need to file an 83(b) election if you own all your shares outright (i.e., they are not subject to vesting)
@@BrettCenkus thanks for your response. So this would not give me tax issues or turn off VC's in the future?
@@marcelfreund7302 There won't be a tax issue. VCs might want you to vest your shares, so doing that now could possibly help, although you can set up vesting later. So, no, I don't see if being any sort of turn off.
Thanks for the response
@@marcelfreund7302 You're welcome, Marcel.