Should I File an 83(b) Given My Stake and Startup Situation?

Someone on Reddit is the non-founder CEO of a startup and received roughly 3.2 million shares at $0.04 FMV (about $128,000 value at grant). The company would reimburse the 83(b) tax via a bonus, but the company is cash poor; they expect a strategic exit in 2 to 3 years and do not expect to meet the QSBS 5-year hold. They have almost decided not to file the 83(b) election because of risk (paying about $50k tax if the company shuts down), cash flow (taking cash out would hurt growth), no QSBS (won't hit 5 years), and investor perception (bonus for 83(b) tax). They asked: Am I missing something? Their accountant and counsel agree with them. Your reasoning is sound. You're not missing anything major; skipping the 83(b) is a reasonable choice given your situation.

Bottom line: Your reasoning is sound and you're not missing anything major. Skipping the 83(b) is reasonable given: (1) risk if the company fails (you'd be out about $50k in tax with 83(b)), (2) cash flow (keeping cash in the business when cash poor), (3) QSBS won't apply (unlikely to hold 5 years), and (4) investor/acquirer perception of the reimbursement bonus. Document your decision, model vesting tax for when the stock vests, and revisit 83(b) for future grants if the outlook or timeline changes.

Question from Reddit

Should I file an 83(b) given the size of this stake and current start-up situation?

Unsolved

I am the non-founder CEO of a start-up and have received roughly 3.2mm shares at a $0.04 FMV. I have negotiated a bonus whereby the company pays me back for the tax burden of making an 83(b) election. However, the company is cash poor. I am trying to raise, but it is difficult and after spending time in the company, I'm not convinced even if I get this thing humming that it will go "to the moon". A strategic exit in the next 2-3 years is more likely. I have single trigger acceleration, but QBSB won't apply because it's unlikely we will hit the 5 year window.

I have almost 100% decided not to do the 83(b) election for the following reasons:

If fundraising continues to be difficult, it's almost guaranteed that I will be out the $50k-ish of ordinary income tax should we shutter

Taking that lump sum of cash out of a growing business would be stupid anyway, as it would kneecap growth

I will never get to the QSBS threshold as stated above

Potential investors/acquirers could bristle at their investment being used for this sort of bonus

Am I missing something? My accountant and counsel agree with me, but I wanted to see if this group of professionals believes I'm missing something.

Source: Reddit

Analysis

The user received restricted stock (about 3.2 million shares at $0.04 FMV, about $128,000 value at grant) as non-founder CEO of a startup. The company would reimburse the 83(b) tax via a bonus, but the company is cash poor; the user expects a strategic exit in 2 to 3 years and does not expect to meet the QSBS 5-year hold. They have almost decided not to file the 83(b) for risk (paying about $50k tax if the company shuts down), cash flow (taking cash out would hurt growth), QSBS (won't hit 5 years), and investor perception (bonus for 83(b) tax). They want a sanity check that they're not missing something. Their accountant and counsel already agree.

Answer

Your reasoning is sound. You're not missing anything major. Here's how your situation lines up with the 83(b) tradeoffs and why skipping the 83(b) is a reasonable choice.

What 83(b) would do for you

With 83(b): You'd pay ordinary income tax in the year of grant on the FMV at grant, about $128,000 (3.2mm × $0.04). At typical rates, that could be about $50,000 or more in federal (plus state) tax. You'd lock in that amount as ordinary income; all future appreciation would be capital gain when you sell (often long-term if you hold long enough). So 83(b) is best when: (1) FMV at grant is low, (2) you're confident the company will succeed and the stock will appreciate, and (3) you can hold long enough (e.g., 5 years for QSBS) so the gain is taxed favorably.
Without 83(b): You pay no ordinary income at grant. You pay ordinary income when the stock vests, each time a portion vests; income = FMV of that portion on the vesting date. So if the company fails or the stock never vests (or vests at low value), you have little or no ordinary income from the stock. If the company succeeds and the stock appreciates by vesting, you have more ordinary income over the vesting years than you would have had at grant ($128k), so overall you'd pay more ordinary income tax than with 83(b). The tradeoff is risk: 83(b) = pay now on grant value; no 83(b) = pay later on vesting value (which can be higher or lower).

Why your reasons for not filing make sense

If the company shuts down: With 83(b), you'd have paid about $50k (or more) in ordinary income tax on $128k of income. If the company folds and the stock is worthless, you don't get that tax back; you're out the cash. Without 83(b), you'd have no (or minimal) ordinary income from the stock if it never vests or vests at low value. So not filing 83(b) reduces your downside if the company fails. That's a valid reason to skip it when the company is cash poor and fundraising is hard.
Cash in the business: Even if the company reimburses your 83(b) tax via a bonus, that's cash out of the company. When the company is cash poor and needs to grow, keeping that cash in the business (or using it for operations/raise) can be more important than locking in a tax position that only pays off if the company succeeds. So "taking that lump sum out would kneecap growth" is a valid business reason.
QSBS: The QSBS exclusion (IRC § 1202) applies to gain on sale of qualified stock held more than 5 years. You don't expect to hit the 5-year window (strategic exit in 2 to 3 years). So one of the big benefits of 83(b), locking in low basis so that all appreciation is long-term capital gain (and potentially excluded under QSBS if you held more than 5 years), doesn't apply to you. That reduces the upside of 83(b) and makes not filing more reasonable.
Investor / acquirer perception: Using investor or acquirer money to reimburse the CEO's 83(b) tax can look like compensation that doesn't directly help the business. Your concern that investors or acquirers could bristle is reasonable and supports not triggering that bonus (and thus not filing 83(b) if the bonus is contingent on filing).

What you're not missing

Risk: You've correctly identified that 83(b) = pay now on grant value; if the company fails, you're out that tax. Skipping 83(b) limits that risk.
Cash flow: You've correctly identified that 83(b) (plus reimbursement) takes cash out of the company when it's cash poor.
QSBS: You've correctly identified that QSBS requires more than 5 years and that you're unlikely to get there, so the capital-gain / QSBS benefit of 83(b) is smaller for you.
Governance / perception: You've correctly identified that investors/acquirers may not like the bonus for 83(b) tax.

One thing to keep in mind

Without 83(b) you'll have ordinary income as the stock vests (FMV at each vesting date). If the company succeeds and the stock appreciates, your total ordinary income over the vesting period can be higher than the $128k you'd have had at grant, so overall tax can be higher than with 83(b). But that's the trade you're making: avoid the downside (paying about $50k now and getting nothing if the company fails) in exchange for possibly paying more tax later if the company succeeds. Given your outlook (strategic exit in 2 to 3 years, not "to the moon"), that trade is reasonable.

Summary

Your reasons for not filing 83(b) are coherent and reasonable. Your accountant and counsel are aligned. You're not missing a major consideration.
Document your decision (e.g., short memo or email to your accountant) so you have a record of why you didn't file.
Model the vesting tax (ordinary income at each vest) so you're ready when the stock vests and for estimated tax or withholding. Margen can help you model income and tax with and without 83(b) so you see the tradeoff clearly.
If the company's outlook or timeline changes (e.g., strong raise, path to 5-year hold), you can revisit 83(b) for future grants; for this grant, not filing is a defensible choice.

Applicable Sections

Federal / IRS

IRC § 83(b): Election to include FMV at transfer in income in the year of transfer. Pay ordinary income tax at grant; vesting does not trigger more ordinary income; sale = capital gain on appreciation from grant. (IRS Form 83(b))
IRC § 83(a): Default: If no 83(b), ordinary income when property vests = FMV at vesting.
QSBS (IRC § 1202): Exclusion of gain on sale of qualified small business stock held more than 5 years; doesn't apply if you sell in 2 to 3 years.

Practical Notes

83(b) = pay now on grant value (about $128k, about $50k+ tax); no 83(b) = pay at vest on FMV at vesting (more if company succeeds, less or none if it fails).
Your reasons (risk if company fails, cash flow, no QSBS, investor perception) are valid; not filing is reasonable.
Document your decision; model vesting tax; Margen to compare with vs. without 83(b).
If outlook or timeline changes, revisit for future grants.

Limitations

This answer does not cover state tax or single-trigger acceleration in detail. It is not tax or legal advice. For your exact numbers and vesting schedule, consult your accountant or counsel. You can use Margen to model the tax with and without 83(b).

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Should I File an 83(b) Given the Size of My Stake and Startup Situation? (Reddit Q&A)