[jkarneges]

To expand on this, if you give an employee stock rather than options, then they'd have to pay taxes on the stock value. It would suck to pay thousands in taxes for stock that ends up being worth nothing when the startup fails. With stock options, the tax issues are deferred and only come into play if the company succeeds and you want to exercise+sell.

[scurvy]

The employee can make an 83b election upon grant, pay for the stock up front, and not get hit with a tax bill upon vest.

If the company is public (either via acquisition or IPO), the company will sell part of your vested stock to cover taxes.

[jalonso510]

I think parent is addressing the situation where the company is giving the employee the stock for free, trying to avoid there being an out-of-pocket cost for the employee. In that case, the value paid is 0 and the entire value of the stock is taxable income to the employee. An 83(b) doesn't solve the problem here because it just makes the IRS calculate the spread on the day of the purchase, rather than at the time of each vesting event, but there is still a taxable spread on the day of purchase.

[jkarneges]

Even with the 83b, you'd still have to pay taxes on the current value. This is practical if the stock still has negligible value (i.e. you joined pre-funding), but otherwise you face being taxed on monopoly money.

[rstephenson2]

My understanding is that you pay taxes not on the current value, but on the difference between the value of the stock and the price you paid for it. It's essentially treated as income.

[jkarneges]

That's correct. But if you're buying shares at non-negligible value then you're basically an investor at that point. No employee is going to do that.

More likely, the company might give away shares to an employee in lieu of salary, but then the employee has to pay taxes on the value.

In other words, there's no way to obtain stock in a private company without facing some kind of expense. You're either paying money directly for shares, or paying taxes on the gift of shares.

The only way to avoid any of this is:

1) Be there at the very beginning, when shares have negligible value and can be bought easily. OR 2) Be granted stock options instead of real stock.

[scurvy]

How much is non negligible?

[jkarneges]

Anything that comes out to $thousands? Most people wouldn't want to risk their own money like this.

[scurvy]

That's not how an 83b election works. Your grant price is the current value, so your taxable gain is 0 upon election. You only have to come up with the money for the stock. Also, you can make a partial election if you don't have enough to buy all of your stock. Many people mess this up.