Section 83(a) of the Internal Revenue Code states a general rule that a founder, employee, or other service provider who receives restricted stock (i.e., stock that is subject to vesting) in a company must pay income tax each year in which stock vests on the difference between (i) the amount paid (if any) for the stock and (ii) the fair value of the stock at the time it vests.  If the stock’s value increases over time (as it hopefully does), then this can lead to a substantial tax burden.  Fortunately, Section 83(b) provides an exception to the general rule of Section 83(a):  Instead of paying income tax each year in which stock vests based on the stock’s fair value at the time of vesting, the person can elect to pay income tax once - in the year he or she receives the stock - on the difference between (i) the amount paid (if any) for the stock and (ii) the fair value of the stock at the time of transfer.  An employee who wants to make a Section 83(b) election must do so within 30 days of receiving the stock.                             

I am a lawyer and an entrepreneur in Denver.  This is the fifth in a series of posts about legal issues affecting startups.