Emerging Enterprise Center Blog - Commentary and Analysis For Entrepreneurs and Startups

83(b) elections seem simple but can be tricky. The general rule is that the recipient of restricted stock (stock subject to vesting) has 30 days from the date of issuance of the stock to file her 83(b) election. Unfortunately, ambiguity often creeps in. For example, what if you sign the contract for the restricted stock on day 1 but the stock is not issued until day 10? What happens if the stock is issued without restriction on day 1 and restrictions are imposed (that is a contract providing for vesting is entered into) by an investor on day 2? And... More

I recently ran into this interesting question: If you want to use reverse vesting and take advantage of 83(b) in an S Corporation what do you do about (1) tax distributions and (2) built up after tax profits? In the case of tax distributions, once the shares are issued, the holder will have to pay tax (to the extent that there are taxable profits) pro rata in accordance with his ownership. So, it seems logical that any distributions made to help stockholders pay this tax should also go to the holder of restricted stock on a pro rata basis. If they do not,... More

I spend a lot of time with entrepreneurs explaining how restricted stock and Section 83(b) or the tax code work. It was the subject of a prior blog entry. However, it comes up so often and different people absorb the concept in different ways, so I thought it might be worth attacking again in a different way. Restricted stock can have some very material tax benefits when compared with options, especially in the early stages of any venture. So, here is how restricted stock works. I will compare it to options later. You may want to incent employees by giving them stock. Here is an example. Easy... More

One thing that I find many entrepreneurs (particularly first time entrepreneurs) struggle with is the distinction between options and restricted stock and why one would use restricted stock instead of options.  See also the following link:  Stock Options and Restricted Stock. I think it is fair to say that most, perhaps all, entrepreneurs have heard of options.  But, just in case, options are contractual rights to purchase shares of stock (usually common stock) at a fixed price.  In the employment context, options typically vest over time.  For example, four year vesting is a common provision in a venture financed company. ... More