Receiving Common Stock in Company - Questions

Say thanks?

There isn't much else you can do other than 1) file the election, 2) understand what you own and what the upside is and under what circumstances that would bear fruit, and 3) be thankful I guess.

FIrst off, it's not a gift... it's compensation, and there will be tax consequences.

It is likely subject to a vesting schedule. As the stock vests, you will have compensation income for the value of the vesting stock. Depending upon the schedule, this could be monthly, quarterly, annual, etc. Whatever the stock value is on that vesting day, that's what is income to you. At that point, you officially "own" the stock.

An 83(b) election means you pick up income at the time of the grant, not the time of the vest, and you pay tax on the value of the stock at grant time.

Whatever value you pay tax on, that becomes your cost basis in the stock, which is part of your future capital gain when you sell the stock down the road.

Ab 83(b) election can make sense if you think there will be a lot of value growth between the time of grant and the time of vest. You would rather pay tax at capital gains rate, down the road ath sale time, than pay tax at ordinary rates sooner.

For example, say value at grant is $1, value at vest is $10, and value at sale is $50.

If you do NOT have an 83(b) election, nothing happens at grant date, vest day you pay ordinary income tax on $10, and you pay capital gains tax on $40 at the time of sale (assuming you hold the stock at least one year).

If you DO have an 83(b) election, you pay ordinay income tax on $1 at grant date, nothing happens at vest date, and you pay capital gains tax on $49 at the time of sale.

Overall, you save the tax rate differential between capital gains rates and ordinary rates on that $9.

There are two risks of making an 83(b) election, both of which might be considerable.

1) The value fo the stock goes DOWN, not UP, between the grant date and the vest date. Thus, you paid ordinary tax rates on more income than you needed to.

2) You never actually vest in the stock. The company blows up, you leave the company, etc.

In both situations you would have some capital losses. But if paying capital gains tax is better than paying ordinary tax, it also holds true that capital loss deductions are not as valuable, as the tax rate savings is lower, and because of the limitaions in deducting capital losses.

83(b) can be a great tool if the stock is an an early state, pre-IPO company with a very current low value, and expection of much higher values down the road. If the current value of the stock is pennies, then even if you don't vest, you probably haven't lost much. The high end benefit might be worth the low end risk.