83b · Cap table

Fundraising without a 83b?

Luis Berga Co-Founder at Music Meets Video

June 27th, 2014

I have a friend who is in a weird situation and she asked me for advice and I have no idea what to tell her. 

At the heart of the issue is that they hired horrible attorneys who actively messed things up for them but what ultimately happened is that they raised a little bit of money ($50k uncapped convertible note and a separate $18k note for 6% from an accelerator) but they didn't file an 83b for their two founders. 

Now they are about to embark on an institutional round of financing and they're stuck and confused. Does anyone have any ideas on how to get this sorted out?

This company also has to get their cap table cleaned up and change from a NY company to a Delaware company so if anyone has any insight there, any help would be greatly appreciated!

Varun Mehta CEO of Disqovery

June 27th, 2014

My best advice is to find a good lawyer with experience with this problem. I work with Jonathan Shapira from Goodwin Procter and he was telling me about the nightmares associated with a botched 83b. At the very least someone like him could lay out the required steps, which will likely involve dissolving the company entirely and building a new one.

Bruce Leban Software developer, inventor, innovator

June 27th, 2014


First, 83b is not needed when you buy unrestricted stock as is typically the case for founders in a startup. It is also is not needed if you add a restriction to stock you already own. In startups, it's commonly the case that founders execute a separate voluntary restriction agreement (which may be revised when additional investors come into the picture). If the company sells or grants stock and it's restricted as part of the sale or grant agreement, that's a different case.

Second, you mention you want to change from a NY company to a DE company. If there was a defect in the original company creation, you can form a new company in DE and then have it purchase the assets of the old company and dissolve it. Downside of this is that capital gains vesting dates start with the new company incorporation rather than the original.

Dave Lemley Consulting Technologist

June 27th, 2014

83b election is for the recipient of a stock grant.  it won't have any affect on their fundraising prospects whatsoever.  it can, however, have significant tax consequences for the recipient of stock (the founders you mention).  Also, it really isn't the responsibility of the lawyers to file this.  Some will, as a convenience, but actually I prefer to file my own so I know good and well that it has been done.  You have 30 days from the date of purchase/excercise to do so.  If these guys (the founders you mention) have not purchases or exercised the stock options they were granted, then they are fine.  If they did, and more than 30 days have past, then they are not fine, but its not the end of the world.

in a brief, non legal explanation, when you get stock, it typically has a vesting period.  And you can't exercise portions before they vest.  But, also, the fair market value of the stock increases, so when you /do/ exercise, there is a price difference ('spread').  That spread is considered income by the IRS, and you have a tax burden for that. Wouldn't it be nice to exercise all of it, when there is no spread?  Well, that's what 83b is about.  You exercise all of it, even before it vests, but also before the prices goes up and thereby creating a spread that is taxable.  So there's the benefit.  Bear in mind, you still have to wait for it to vest before you actually own it, and if you leave before fulling vesting, then the money you laid out for the exercise of the unvested shares is lost.


June 27th, 2014

I just did a quick Google and came up with this:


TL;DR: We need to know the nature of your friend's stock ownership. According to the article: "83(b) filings are only required in cases where the founder grants consist of so-called "restricted stock," which is a form of stock where the founder’s stock is subject to forfeiture on termination of his service relationship with the company." Does this apply?

Robert H Lee

August 8th, 2014

General ideas:

Cancel the initial issuance and reissue. IF the stock has appreciate your owe tax.

Otherwise close the corp, and redo the corp, issuance and financing, with the financing right after the issuance.