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Tax Implications of company founder's stock (that has no vesting)
Anonymous7 views2 answers
As founder of a startup , I was issued fully - owned shares that never had any vesting schedule . My understanding is that typically if a Founder is issued restricted stock ( IE stock with time - based or performance - based vesting ) they'd file an 83 ( b ) election to be taxed at the value of the shares when initially issued , rather than paying income tax on the value when exercised in the future ( instead paying capital gains on the difference between the amount initially paid and the value of the stock when sold ) . However , because my stock was never restricted I don't believe 83 ( b ) is applicable . In this case , what are the tax implications as the value of the shares increases ( for example , when we close a financing round ) and when they're sold ? What can I do to minimize the tax burden ?
I agree with you that your only tax implication will be capital gain on the sale of the stock. I don't think Secdtion 83 applies to you. Section 83 subjects to tax the value of stock received in exchange for services (i.e., as a form of compensation). You didn't receive the stock in exchange for services - you bought it at par - so I don't think Section 83 is implicated and there's no need to consider an 83(b) election.
You are correct that an 83(b) election is made if stock is issued subject to a substantial risk of forfeiture, e.g., a vesting schedule, and the employee wants to take the value of the stock into income at the time of grant rather than to wait and be hit with the value at the time that the forfeiture lapses. In your case you received the shares without restriction so you should have taken them into income at that time. This way there is no gain as they increase in value; the only gain is when you sell. Minimizing the tax burden is accomplished by giving the stock to a charitable remainder trust, letting the CRT sell the stock, and getting an annuity or unitrust payment from the CRT. That's a lengthier topic than we can cover in an e-mail.
