The Persona (The "Hero")
Mark is a "paper millionaire" whose $15 million valuation is locked in unvested stock while he lives on a modest salary to fund his startup's growth.
Mark, Founder & CEO of a Seed-Stage AI Infrastructure Startup. Mark is the quintessential "paper millionaire." On paper, his company is valued at $15 million. In reality, he draws a modest founder’s salary and pours every spare cent back into engineering talent. His net worth is tied entirely to his common stock—a fortune that is currently locked behind a vesting schedule.
The Challenge (The "Villain")
Mark missed the 30-day 83(b) filing window, triggering a massive tax crisis on his vesting shares.
Mark sat in our office with a look of pure, unadulterated panic. Two weeks prior, during a due diligence prep for his Series A, his lead investor’s counsel asked a simple question: "Can we see the stamped copy of your 83(b) election?"
The room went cold. Mark hadn’t filed it. He had incorporated 14 months ago, and the 30-day window to tell the IRS he wanted to be taxed on the value of his shares at the time of grant (when they were worth $0.0001) rather than at the time of vesting had slammed shut over a year ago.
The Crisis: Because his shares were vesting monthly and the company’s valuation was skyrocketing, the IRS now viewed every vesting cliff as a taxable event. As his shares hit his account, he would owe ordinary income tax on the "spread"—the difference between his $0.0001 strike price and the current $2.50 Fair Market Value.
Mark was facing a "Dry Tax" nightmare: he would owe hundreds of thousands of dollars in taxes on shares he couldn't even sell yet. He was looking at personal bankruptcy just to keep his own company’s stock.
The Analysis (The "Insight")
Mark faced a massive tax crisis from vesting shares, solvable only by a precise "re-shuffling" of his equity since the 83(b) deadline had passed.
When we ran the numbers through the Rally Equity Stress-Test, the outlook was grim.
Mark had 2,000,000 shares. Without an 83(b), every time a block of 41,666 shares vested (monthly), he was technically earning "income."
Current FMV: $2.50 per share.
Monthly Taxable Income: $104,165.
Estimated Monthly Tax Bill: ~$40,000.
Mark didn’t have $40k a month in cash. No founder does. If left unaddressed, he would be forced to abandon his shares or forfeit his majority stake just to pay the IRS.
The Rally Insight: You cannot "backdate" an 83(b) election. The IRS is a wall of granite on this rule. However, the IRS cares about the specific grant of shares. We realized that while Mark’s current shares were a tax ticking time bomb, the law allowed for a "re-shuffling of the deck" if handled with surgical precision.
The Solution (The "Action")
Rally fixed the missed deadline by having Mark forfeit his shares and re-issuing a new class of stock with a strictly tracked 83(b) filing.
We didn't try to fight the missed deadline; we pivoted around it. Rally worked alongside Mark’s legal counsel to execute a Recapitalization and Grant Reset Strategy.
The Forfeiture: Mark voluntarily forfeited his unvested "toxic" shares back to the company. Since they were unvested, there was no immediate tax consequence for giving them back.
The New Class: The company authorized a new class of "Restricted Common Stock" with slightly different rights (liquidation preferences or voting nuances) to ensure it was a distinct security.
The Re-Grant: The board re-granted Mark the equivalent number of shares in the new class.
The Rally 83(b) Safeguard: Within 24 hours of the new grant—not 30 days, but 24 hours—Rally prepared the 83(b) election, sent it via USPS Certified Mail with Return Receipt Requested, and physically tracked the filing into the hands of the IRS.
The Result (The "Win")
Mark avoided a $2.1 million tax bill and saved his company by filing a timely 83(b) election.
By resetting the clock, Mark was able to file a valid 83(b) election on the new shares.
Tax Bill Today: $0 (The new shares were granted at FMV).
The "Dry Tax" Savings: We eliminated the $40,000 monthly tax liability.
The Big Number: Over the remaining 3 years of his vesting schedule, taking into account the projected Series A and Series B valuation jumps, we saved Mark an estimated $2.1 Million in aggregate tax liability.
Mark went from potentially losing his company to the IRS to having a clean Cap Table ready for Series A investors.
Why the 83(b) Election is the "Silent Killer" of Startups
If you are a founder or an early employee at a startup, the 83(b) election is the most important document you will ever sign. Here is why the "Lost Founder" scenario happens so often and how you can avoid it.
1. The 30-Day Hard Deadline
The IRS gives you exactly 30 days from the date of your equity grant to file. There are no extensions. There is no "oops" clause. If you miss it, you are taxed on the value of the shares as they vest. In a high-growth startup, this is a financial death sentence.
2. The Difference Between ISOs and Restricted Stock
Many founders confuse Incentive Stock Options (ISOs) with Restricted Stock. While you can sometimes file an 83(b) on an "early exercise" of options, it is mandatory for restricted stock if you want to lock in a low tax basis.
3. How Rally Tax Prevents the Crisis
We don't just "do taxes." We manage Equity Lifecycles.
Automated Tracking: We sync with your Cap Table management software (like Carta or Pulley) to flag new grants the moment they happen.
Proof of Filing: We don't just tell you to mail a letter. We ensure the documentation is bulletproof, providing the "Certified Mail" evidence that investors will demand during your next funding round.
Strategic Restructuring: As seen in Mark’s case, if a mistake has already happened, we look for legal, compliant "pressure valves" to reset your tax position before the valuation hits the moon.
Don't Let Your Vesting Schedule Become a Liability
Tax planning for founders isn't about April 15th; it's about the day you incorporate. Whether you are a solo founder or a Pre-IPO executive, your equity is your wealth. Don't let a 30-day paperwork error cost you millions.
Frequently Asked Questions
1. What exactly is an 83(b) election?
It is a letter you send to the IRS within 30 days of receiving equity (like restricted stock) that is subject to vesting. By filing it, you are asking the IRS to tax you on the value of the shares today (at the grant date) rather than later (as they vest).
The Benefit: If your shares are worth almost nothing now, you pay $0 in tax and lock in that "cost basis." Any future growth is taxed at lower capital gains rates, not as high-taxed ordinary income.
2. If I missed the deadline, am I stuck with a massive tax bill?
Not necessarily, but you cannot fix it by simply filing late. You must use strategic "rescue" maneuvers, like the one in our case study:
The "Reset" Strategy: Forfeiting unvested shares and having the company re-grant a new class of shares. This creates a new 30-day window.
The "Fair Market Value" Amendment: Amending your grant so the company's right to buy back shares is at "Fair Market Value" rather than "Cost." This can technically remove the "risk of forfeiture" and stop the recurring tax events, though it has legal and investor implications.
3. Does this apply to RSUs or just Stock Options?
RSAs (Restricted Stock Awards): Yes. These are the most common for founders and early employees.
ISO/NSO Early Exercise: Yes. If your company allows you to "early exercise" (buy shares before they vest), you must file an 83(b) to lock in the tax treatment of those unvested shares.
RSUs (Restricted Stock Units): No. You cannot file an 83(b) for RSUs because you don't actually "own" the shares until they vest and are delivered.
