How to file 83(B) election from Europe
“There's one very crucial piece of paper that we talk about until we're blue in the face to everybody because there's actually no way to go back and fix this. We've seen companies who haven't filed what's called an 83(B) Election, and deals have blown up.” Kirsty Nathoo, Partner and CFO at Y Combinator
One of the challenges that we see many European founders face is incorporating a company in the US, opening a bank account, and filing relevant post-incorporation and tax-related paperwork in a timely manner.
During the last year, I have been approached by over 30 founders, both affiliated and unaffiliated to SmartGateVC, who encountered the difficulty of filing 83(B) elections following the incorporation of the company. While the process is pretty straightforward, it might be stressful for first-time founders with no previous experience with US government agencies such as the IRS.
This article is a practical guide for a founder seeking to file an 83(B) election from Armenia and Europe.
1. What is vesting and what it has to do with the 83(B) election?
When founders issue stock the standard practice is to put them under a vesting schedule. This basically means that although the stock is issued to the founders their full ownership will not happen until a certain period of time passes.
The rationale for this is to incentivise all founders to stick with the company during the hardest times and distribute the ownership of the company fairly. In case one of the founders decides to leave the company before all of the issued stocks are vested, the founder will be owning only the portion of the stocks that got vested during the period he/she was involved in the company.
An equity holder should file an 83(B) election ONLY if the equity is subject to vesting. If there is only 1 founder in the company, vesting the shares might not even be necessary hence there won’t be a need for 83(B) election.
2. What is 83(B) election, and why should equity holders file the election?
83(B) election allows the recipient of stock not to pay taxes when shares vest, and only pay whenever the equity is sold. By default, vesting is seen by the IRS as income - the company paid you with the stock so you must pay taxes.
The table below is a basic case study where the company issues to a founder 4M shares with 4 years of vesting. 2 scenarios with respective tax implications are demonstrated: with and without 83(B) election.
* (($25 x 4,000,000) - ($1,000,000 + $5,000,000 + $10,000,000 + $20,000,000)) x 20%= $12,800,000
** (($25 x 4,000,000) - $4) x 20% = $19,999,999.2
Please note that in case of not filing the election, the founders are obligated to pay taxes every time the stock vests (before any exit and regardless whether the company is going to fail or succeed. These taxes are the founders' personal liability and have nothing to do with the company. This is a deal breaker, because founders usually won't have cash to pay taxes and investors won't like their cash to go for taxes.
Deferring taxes till the company exits is a better strategy in most of the cases. And that is the main reason why it is strongly recommended to file an 83(B) election.
3. How do you file 83(B) election from Europe?
You can download the 83(B) election template at the end of the article.
Fill in all the required fields of the form. If you are not a US citizen or taxpayer, simply indicate “N/A” for IDENTIFICATION NO. OF TAXPAYER and IDENTIFICATION NO. OF SPOUSE.
Fill in 2 identical copies of the document and put a wet ink signature on both. Please note that the IRS does NOT accept electronic signatures.
You can use FedEx to ship the documents from Armenia or other European countries. Please make sure to include a self-addressed, postage-paid envelope so the IRS can return the second copy of the document. Save all the invoices for the shipping and the tracking number.
The filings of international founders (non-US) should be mailed to the following address.
Department of the Treasury
Internal Revenue Service
Austin, TX 73301
Another recommended way to send the document package is through USPS. If you have a friend or relative in the USA or know someone who is visiting the USA during the period of filing, you can ask them to ship the documents for you and get back the stamped copy.
The filings of international founders (non-US) should be mailed to the following address if you are NOT using carrier services.
Department of the Treasury
Internal Revenue Service
Austin, TX 73301-0215
The package should also include a note to the IRS indicating that you have provided two copies, and you are expecting to get back back one stamped copy of the document. See the template at the end of the article.
Getting back the copies might take up to 4 months.
After you get back the stamped copies of the documents, save those for future use.
4. When do I file an 83(B) election?
IRS should receive the election within 30 days of acquiring the stocks (issuing the stocks). Please note that the 30-day count starts when the stocks are issued and NOT when the company gets incorporated.
5. Why do I need to file an 83(B) election if I'm not a US taxpayer?
At some point, if the company takes off, equity holders may need to relocate to or spend more time in the US which can qualify them as a US taxpayer. If this happens during the vesting period, the equity holder will be liable to pay taxes on the spread between fair market value and the purchase price of the shares.
Please don't consider the information above legal advice. The recommendations are based solely on my previous experience of incorporating companies and filing documents with over 30 Armenian founders.
Should you have further questions, contact me: