Money Talk with Malik | Financial Planning for Builders

Key Takeaways

The 83(b) election lets you pay tax on restricted stock at grant (when value is low) instead of at vesting (when value might be high)
You have exactly 30 days from the grant date to file, or you lose the option forever
AI startups with rapid valuation growth benefit most from 83(b) elections
Filing is simple (one-page form), but missing the deadline can cost you six figures in extra taxes
Even if the stock ends up worthless, you don't get the tax you paid back (but the upside protection is worth it)

AI startups raised massive funding in 2025 and early 2026. Companies like Goodfire hit a $1.25 billion valuation on their Series B. That kind of growth is incredible for founders and early employees, but it creates a tax trap most people don't see coming.

Let me explain the 83(b) election using real scenarios from AI founders I've worked with.

What Is an 83(b) Election and Why Does It Exist?

An 83(b) election is a letter you send to the IRS saying, "I want to pay tax on my restricted stock NOW, based on its current value, instead of paying tax later when it vests."

Why would you do this? Because of how restricted stock is normally taxed.

Normal taxation (without 83(b)): You get restricted stock that vests over four years. Each time stock vests, you owe ordinary income tax on its current fair market value. If the company's valuation skyrockets, you owe tax on a much higher value, even if you haven't sold any stock.

With 83(b) election: You pay tax on the stock's value at grant (usually very low for early-stage startups). Then when you sell the stock years later, the entire gain is taxed as long-term capital gains (lower rate).

This is from IRS Section 83(b), created specifically to help early employees and founders avoid getting crushed by taxes on illiquid stock.

How Does an 83(b) Election Work in Practice? (Real AI Startup Example)

Let's use a real scenario. I worked with an engineer at an AI startup (Series A stage). She got 50,000 shares of restricted stock as part of her compensation package. The shares vest over four years (25% per year).

At grant, the fair market value was $0.10 per share (total value: $5,000). The company was valued at $20 million.

Scenario 1: She does NOT file an 83(b) election

Year 1: 12,500 shares vest. Company is now worth $80 million. Her shares are worth $1 per share. She owes ordinary income tax on $12,500. At a 35% marginal rate, that's $4,375 in tax (and she hasn't sold anything).
Year 2: 12,500 shares vest. Company is now worth $300 million. Shares are worth $4 each. She owes tax on $50,000. That's $17,500 in tax.
Year 3: 12,500 shares vest. Company is now worth $800 million. Shares are worth $10 each. She owes tax on $125,000. That's $43,750 in tax.
Year 4: 12,500 shares vest. Company IPOs, shares worth $20 each. She owes tax on $250,000. That's $87,500 in tax.

Total tax paid over four years: $153,125. And she hasn't sold a single share. If the stock is still illiquid (pre-IPO, no secondary market), she's paying this out of her salary.

Scenario 2: She files an 83(b) election within 30 days of grant

At grant: She pays ordinary income tax on $5,000 (50,000 shares x $0.10). At 35%, that's $1,750.
Years 1-4: No tax due as shares vest (already paid tax at grant).
When she sells (let's say five years later at $20/share): She sells 50,000 shares for $1,000,000. Her cost basis is $5,000 (what she paid tax on). Capital gain: $995,000. Long-term capital gains tax (20% rate): $199,000.

Total tax: $1,750 (at grant) + $199,000 (at sale) = $200,750.

Compare that to Scenario 1, where she paid $153,125 over four years AND THEN would owe capital gains tax when she sold. The 83(b) election saved her over $100,000 in this scenario.

What Happens If the AI Startup Fails After You File an 83(b)?

This is the risk. If you file an 83(b) election and pay tax on $5,000 worth of stock, and then the company goes to zero, you don't get that $1,750 in tax back.

But here's the thing: If you're joining an AI startup at Series A or later, you're betting on the upside. The $1,750 is insurance against a massive tax bill if the company succeeds. I've seen founders pay $50K+ in unnecessary taxes because they didn't file an 83(b) on a company that 10x'd in valuation.

My take: If you believe in the company enough to work there, you should file the 83(b). The downside (losing the tax you paid) is capped. The upside (saving six figures in taxes) is huge.

How Do You Actually File an 83(b) Election?

It's shockingly simple. You don't need a lawyer. Here's the process:

Download the 83(b) election form (it's a one-page letter template, easy to find online).
Fill in the details: Your name, SSN, address, number of shares, fair market value at grant, amount you paid for the shares.
Sign and date it.
Mail it to the IRS within 30 days of the grant date. Use certified mail with return receipt so you have proof.
Send a copy to your employer (they need it for their records).
Attach a copy to your tax return when you file.

That's it. The whole thing takes 15 minutes.

Critical mistake: People assume their startup's lawyer or HR will remind them. They won't. This is YOUR responsibility. Set a calendar alert the day you receive restricted stock: "File 83(b) in 20 days."

When Should AI Startup Employees NOT File an 83(b)?

There are a few situations where an 83(b) doesn't make sense:

You don't believe the company will succeed. If you think there's a high chance of failure, paying tax upfront is a waste.
The fair market value at grant is already very high. If you're joining a late-stage AI startup (Series C+) and the FMV is $5/share, you'd owe significant tax at grant. In that case, the math might favor waiting.
You're getting RSUs instead of restricted stock. RSUs don't qualify for 83(b) elections (they're taxed at vesting no matter what).

But for most early-stage AI startup employees (Series A or B), the 83(b) is a no-brainer.

What About Founders? Should They File 83(b) Elections Too?

Absolutely. Founders typically get restricted stock at formation when the company is worth almost nothing (FMV might be $0.001 per share). Filing an 83(b) means paying tax on nearly zero value.

Example: Founder gets 5 million shares at $0.001 per share (total value $5,000). Files 83(b), pays tax on $5,000 (maybe $1,500 in tax). Five years later, company sells for $100 million and his shares are worth $20 million. Without the 83(b), he'd owe ordinary income tax (37% federal rate) on $20 million as the stock vested. That's $7.4 million in tax. With the 83(b), he owes long-term capital gains tax (20%) on the gain, which is still significant but WAY less.

Every founder I've worked with who didn't file an 83(b) at formation regretted it.

Summary

The 83(b) election is one of the most powerful tax strategies for AI startup employees and founders, but it's time-sensitive and non-reversible.

Here's what you need to remember:

File within 30 days of receiving restricted stock, or you lose the option forever
Pay tax on the stock's current (low) value instead of future (high) value
The downside is capped (you lose the tax you paid if the company fails)
The upside is massive (save six figures on a successful exit)
It's a simple one-page form you can file yourself

If you're joining an AI startup or founding one, set a calendar reminder right now: "Check if I need to file 83(b)." Don't leave six figures on the table because you forgot a deadline.

Sources:

IRS Section 83(b) (Property Transferred in Connection with Performance of Services)
Real case studies from AI startup employees (names changed)

83(b) Elections Explained: Real Examples from AI Startups