[jpdoctor]

First, IANAL. Second:

83b election essentially says: Dear IRS, I know I received all these unvested unexercised options, but I want you to tax me on them as though they were all exercised when I received them. You do this in the year they are assigned to you.

Since this is before the company actually takes funding, the shares are worth some stupidly low number ($0.001/sh). So 1M shares is $1000 of income. Since he was not making much money, that amounts to maybe $200 of income tax on 1M shares.

When he goes to exercise the options, no income tax is paid because he already paid it! He can use those share for ALL SORTS of collateral for the future. As long as he doesn't actually sell the shares, no income tax is due.

[SatvikBeri]

Thanks for the explanation. I'm trying to understand whether 83b elections would apply to me-I'm an employee who received options that will vest over a certain number of years. Should I be making a 83b election every time part of my options vest? I expect the fair market value of the stock in the future to be higher than when I receive my options.

[jpdoctor]

First, I am not knowledgeable enough to provide advice.

With that in mind: My experience is that it makes sense to go the 83b route before any funding rounds (when the price is 0.001 $/sh).

After that, there is usually decent money going out the door to the IRS. Since such a tiny fraction of startup shares are ever worth a damn, it just isn't worth the time, money or hassle.