How to make an 83(b) election for your company stock options

Many individuals are interested in making the 83(b) election to minimize long-term tax due. However, this may or may not be a good choice for you. I will not go through the analysis and pros/cons of such a choice in this post. This is for information purposes on the mechanics of making the election.

Before making the election, it is important to understand whether your stock option agreement allows this. Your company should share an 83(b) election form with you, if you are eligible for this. You can also look at your stock option plan documents to see if it allows for accelerated vesting of your options.

You need to review your agreement to ensure it allows accelerated vesting. This gives you the choice to exercise your option and buy your stock now to show the stock was transferred to you and is in your control. You will likely still have restrictions on the stock in case of separation with your company.

Please review your stock option agreement and talk to your finance department to find out if you are eligible for this election.

Now on to the mechanics of Completing the 83(b) Election your company provided!

First: Pay your Company for the shares

The first thing you should know about making the 83(b) election is that you must elect to accelerate your vesting and pay for your shares first. Paying for your shares shows you own the stock and the risk of forfeiture is sufficiently minimized from the IRS’ perspective. Once you own the shares you may now make an election on your shares.

Next: Completing the 83(b) Election form

The election form is generally provided by your company (or their attorney). This form asks for your personal information and information on the shares you wish to elect this treatment for.  The election must be made within 30 days of receipt of the shares.

The fair market value of the shares is generally the most recent 409(a) valuation or Series funding value for non-publicly traded companies. This is something you should ask your company for.

Gross income is the total fair market value less the amount you paid for your shares. This amount is something you may owe taxes on, depending on the situation. Ask your company if they withhold taxes due via payroll for your election, or if you will be personally responsible for them.

Once the form is complete, it’s time to prepare all the paperwork!

Cover Letter and Copies, copies, copies

Preparing to file the 83(b) election requires a bit of paperwork. This paperwork ensures you have proof of the election if it is lost at a step in the process: on the way to the IRS in the mail, at the IRS office, etc.

You will need to create a cover letter for the election (sample here  or provided by your employer). The cover letter will tell the IRS that you’d like a copy of the election stamped as received, and sent back to you in the mail. This ensures you have proof the IRS received your election request. Make sure you include a copy and a self-addressed, stamped envelope for ease.

To the IRS

  • Cover Letter
  • Original signed 83(b) Election Form
  • Copy of signed 83(b) Election Form
  • Self-addressed and stamped envelope for returning confirmation to you
  • Send to the IRS via your IRS home office location (found here for 2016). Take the package to the U.S. Post Office and attach a Certified Return Receipt (example here). This receipt will serve as proof of the post-stamp date in case the IRS claims you did not send it within the 30 day period. Keep this for your records.

To your employer

  • Check for shares (already should be with them – but double check you did this!)
  • Copy of Cover Letter
  • Copy of signed 83(b) Election
  • Copy of Certified Return Receipt

For your records

  • Original signed 83(b) Election Form
  • Original Certified Return Receipt
  • Copy of Cover Letter
  • Copy of Check for Shares
  • Stamped IRS returned copy of signed 83(b) Election Form (once you receive it in the mail)

This post does not include a discussion on the pros and cons of making an 83(b) election. This post is for informational purposes on the mechanics of the election. Discuss whether making the 83(b) election makes sense for you with your accountant or financial advisor.

Where are you in your start-up adventure?

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The above discussion is for informational purposes only. Recommendations are of a general nature, not based on knowledge of any individual’s specific needs or circumstances, and there is no intent to provide individual investment advisory, supervisory or management services.
If you live in a state with it’s own form of state AMT, this further complicates the matter. AMT calculations can be difficult and you may need professional help, such as that of an accountant, tax attorney, or someone experienced in complex tax returns.

Corporate to Start-up: Benefit Package Differences

Originally posted on GeekWire.com.

Seattle is quickly advancing as a tech hub. Large satellite offices and tons of startup options invigorate many employees to make the jump to smaller tech companies. I think the flow of talent is wonderful when it ignites a passion to fulfill your dreams. Feel the fear and do it anyways!

Everyone should be able to follow their dreams with as few obstacles as possible. One major difference between big tech company life and the start-up world is employee benefits.

Figuring out what’s best can take time and effort.

  • What are my health plan options?  Should I sign up for a HSA?
  • Do I need additional insurance beyond what my employer provided?
  • What should I do with my RSUs as they vest?
  • What are my 401(k) options and how much should I save?
  • Am I going to owe the IRS taxes at year end?

I started working with a client who moved from Microsoft to a start-up.  We found there were quite a few differences in what was available under each plan. Microsoft offered disability and life insurance, a 401(k) with diversified stock choices at low expense ratios, and professional assistance perks.  At the new start-up, he encountered implications with the benefits package: minimal health plan, no life and disability insurance, no 401(k), and limited perks beyond snacks at work. Having the right advisor help you determine what to do next can make a huge difference.

Minimizing personal risks

  • Do you have an emergency fund? Small start-ups are less stable and have a higher chance of failure. Reassess your emergency savings and determine whether you need additional funds. Depending on your situation, this may include six months’ worth of expenses, or more. If you’re in a larger start-up, consider  additional savings in case you believe it makes financial sense to buy out your vested stock options.
  • 3,000 Americans become disabled every hour (1). Do not underestimate the crippling effect this can have on your family. If your employer provides disability insurance, generally this amounts to around 60% of your salary up to a cap (commissions not included). When your employer provides this group benefit and pays the premium, the benefit is taxable to you. Can your family survive on the provided benefit? Are there parameters that could change your ability to use it? Not all benefits are the same, and the applicable coverage varies widely. Individual disability insurance can fill the gap between your employer’s plan and what you need to survive financially.
  • Employer plans may include life insurance. Generally I’ve seen this range from $50,000 to a multiple of your salary. The premium cost of the first $50,000 of life insurance provided through your employer plan generally is considered tax free for you. Beyond that, the premiums paid on your behalf may or may not be taxable to you under the plan.

Consult with your advisor and/or insurance broker to understand whether you need additional coverage to ensure your family’s ability to maintain financial stability if something happens to you.

Maximizing tax-deferral strategies

  • Effectively manage your retirement options. Does your employer offer a Roth 401(k) component? A Roth is not always the winning choice and depends on assumptions you believe now and hope will prove true over time. You must preemptively decide: Will your tax rate during withdrawal years be higher? How much money will you need for annual expenses in retirement? Do you need the additional tax-deferral now? How large will your estate be when you pass? This will be an estimate your advisor can assist you with. Carefully weigh your options and check back in periodically since the best strategy will most likely shift over time.
  • Sock away money in employer provided accounts beyond retirement. Most start-ups are focused on high-deductible health plans (HDHPs) with health savings account (HSA) options. All HSA contributions, up to the permitted max, are tax-deductible, and earnings accumulate tax free. If your current salary and bonuses allow you to budget savings and maximize your retirement options, consider setting up your HSA account and pay for medical expenses with your after-tax cash on hand. Your investment philosophy will help you determine what is best.
  • Some companies provide further benefits for families through dependent care flexible savings accounts. These accounts allow a max pre-tax contribution annually for current year use. Covered expenses include qualified care for children, parents, or other dependents. Although unused contributions are lost at year end, this can be a great benefit for those in a higher tax bracket with known needs.

Accumulating wealth

  • Negotiating your compensation package may provide a huge head start in accumulating long-term wealth at the right company. Have you negotiated for the right parameters in your agreement? Were you offered stock options but negotiated for restricted stock?
  • Stock compensation planning goes beyond the tax implications (but make sure you have an idea of what to expect). Also consider planned selling and how to hold the stock. If you have highly appreciated stock, there are multiple ways to gift this with a lower tax impact. Alternatively, what if you want to sell early? Know the secondary market available for your stock.
  • Minimize the golden handcuffs by ensuring you understand the long-term compensation structure. The initial compensation agreement sets the tone, but understanding how bonuses, stock grants, and salary work longer term will help you know where you want to be and evaluate where you are now.

Life gets tricky as you move from one company to another and you can no longer expect the same protections and benefits. Start-ups offer great personal perks, but may require you to think more about what you are doing on the financial side.

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The above discussion is for informational purposes only. Recommendations are of a general nature, not based on knowledge of any individual’s specific needs or circumstances, and there is no intent to provide individual investment advisory, supervisory or management services.
If you live in a state with it’s own form of state AMT, this further complicates the matter. AMT calculations can be difficult and you may need professional help, such as that of an accountant, tax attorney, or someone experienced in complex tax returns.

1Disability Divide: The Council for Disability Awareness, March 2010.

Family Saving Styles: Top 5 questions to ask yourself

Every family is different – different in how they spend money, how much money they make, and their comfort level with discussing money.

A friend of mine recently got married and they still keep everything separate, with one in charge of utilities and another the mortgage, etc. They are thinking of combining finances, but just aren’t sure what the best method is for them.

How do you determine what you are most comfortable with? Start by asking yourself 5 questions:

  1. Do I feel like I need to be in control of the money I have? Why?
  2. Does combing our funds make me feel like I’ve lost control of our money? Why?
  3. What are my partner’s views on money and how it should be used?
  4. Does either of us budget on a high level how much we should save and do we each stick to those goals?
  5. How comfortable am I with my partner’s spending patterns?

Money is really about security and/or freedom to do what you want.

It is always a good time to ask yourself what the best set up is for you both when it comes to money.  Knowing how you feel about money will help reduce the friction with your partner.

My husband and I started with entirely separate finances when we first got married – this was most comfortable at the time.

Then, we quickly found value in a joint account where we each contributed the same percentage of our salary with the remainder separate. The joint account was used for joint expenses – rent, groceries, dining out together, utilities, etc. Expenses we clearly shared.

Some individuals feel better with an ‘allowance system’ where each individual receives a set amount of fun money and the remainder goes into joint accounts. This way, if one partner has a habit of spending whatever money is in their account, then they have a smaller amount to work with.

Others are comfortable with combining all funds into joint accounts and going from there.

Money is an ongoing topic in relationships and it is important to start out acknowledging the truth of how you feel about money, how you treat money, and how you can work together to set an optimal method for you both.

Intuitively we think of money as adding and subtracting – logical and known. What we don’t account for are the emotions and stories we each tell ourselves about money based on our past experiences.

If you are nervous about starting these conversations with your partner alone, reach out to us.

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The above discussion is for informational purposes only. Recommendations are of a general nature, not based on knowledge of any individual’s specific needs or circumstances, and there is no intent to provide individual investment advisory, supervisory or management services.
If you live in a state with it’s own form of state AMT, this further complicates the matter. AMT calculations can be difficult and you may need professional help, such as that of an accountant, tax attorney, or someone experienced in complex tax returns.

Hustlin’ as an Entrepreneur

When you decide to make the jump from employee to entrepreneur, it is important to consider how this transition will affect your financial life.

How will you support yourself?  Do you have a family to support?  How long will you be able to sustain before you need further income?

Three ways to prepare for the entrepreneurial rollercoaster of cash flow

Emergency Savings:  This requires a bit more foresight and commitment.  When leaving an employer to launch a start-up, it often takes over a year to reach sustainable cash flow and salary to a founder.  The best way to prepare is to keep a separate emergency savings account with at least a year of savings for basic budgeted needs + a small fund for unlikely incidents (i.e. Car breaks down, roof needs update, etc.)

If you don’t have this much in savings, you may need to continue to work in some capacity to supplement your financial needs.  Time for the side hustle!

Side hustle to your business: Many founders use previous experience to consult while they build out their business model and acquire clients. This can help reduce the amount of emergency savings you need on hand, as long as you are meeting your financial needs through the consulting fees.

Side hustle is your business: Other founders flush out their business model in the evening and on weekends while maintaining full time jobs.   They set specific milestones or level of client traction before moving forward with quitting their job.

When considering these alternatives, ask yourself:

  • How much risk am I willing to take pre-revenue?
  • How much revenue do I need to support my salary?
  • What milestones can I hit working on my product part-time?
  • Am I compromising my client relationships by not being available or is my current position flexible on work hours?

Don’t forget you are leaving your company’s employee benefits behind as well.  Make sure you have a full understanding of your additional expenses and risks in starting your own business.

Good luck in your journey of entrepreneurship and let us know if we can help you with the financial side.

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The above discussion is for informational purposes only. Recommendations are of a general nature, not based on knowledge of any individual’s specific needs or circumstances, and there is no intent to provide individual investment advisory, supervisory or management services.

So you want to be an entrepreneur…

This is not the first article on dancing with the idea of doing your own thing.  It certainly won’t be the last one.  This post is about the hard questions, the plan, and the execution you need to commit to before taking the leap.

I’ve worked for large companies and startups, consulted independently, run my own practice, and worked as a Director for a start-up investment fund.

The thread running through successful entrepreneurs is focus and understanding of who they are and how they will execute.

Below are some of the most basic thoughts around this topic that I find often overlooked in our rush to read every ‘top 10 things article’.  It’s time to take a step back, breathe in and out, and think freely for a moment.

Is the grass always greener on the other side?

Entrepreneurship offers a world of flexibility and freedom.  You can work from anywhere, choose your hours, and deliver on a passion project you’ve wanted to do for a long time.

But of course, with great power comes great responsibility…

Entrepreneurship isn’t easy.  You are in charge of everything: sales, marketing, message crafting, office management, and if you are lucky you will get to spend a few hours a day on what you are passionate about.

It’s time to be very clear with yourself on your strengths and weaknesses and be real with yourself.

  1. Assess your weaknesses and strengths
  2. Ask yourself why this is the way you are (sometimes this requires multiple whys)
  3. Determine how this may affect you in a new environment (aka, starting up)

So what does that mean for me if I decide to quit my job and start my own business?  Will I be able to put my head down and quickly reiterate to a working business model?  Will I be as quick to accomplish milestones timely?  Will I do what I said I would?

Entrepreneurship is about getting to know yourself at a very visceral level.  There is no where to hide and your actions can easily be accounted for if 6 months into your new adventure you have 0 clients, $0 revenue, and you are still holding onto your number of unique page views as proof of success.

Choosing a path to start on

Once you believe you have the heart and the foundation to be successful, begin to evaluate your ideas.  The $100 Startup: Reinventing the way you make money by Chris Guillebeau says it best.  Ask yourself:

a. How would I get paid with this idea?

b. How much would I get paid from this idea?

c. Is there a way I could get paid more than once?

I would also add, which idea are you most passionate about?

How will this business affect your personal goals?

If you are toying with a few different ideas, these questions will help you see the personal value proposition in each idea.

Be able to distill your goal into a meaningful sentence or two.  You are doing what, for who, and are fixing what major pain point for them?  

I’ve talked to far too many entrepreneurs who do not know the answer to the above question.  As a prospective client or investor, I need to be excited and curious about your business in one minute or less.  As an entrepreneur, YOU want this as well because it helps cut through the noise.  You will be able to quickly identify whether you’ve made a business connection or not.

Leading me to believe:

The first rule in starting-up should be to talk about your start-up succinctly for the situation.  I won’t harp on this – boil your value proposition down to 6 words or less.

It’s not about the idea, it’s about the execution.

I am a big believer that most ideas have already been conceived – whether in the shower, at a bar with friends, or in a brainstorming session.

Once you define your targeted business idea and why you are doing it take a moment to day dream and ask yourself:

What does success for your business look like?

Where are you sitting while working at your business?

How many people are around you?

What are you doing with your day?

How are you interacting with customers?

How do your customers feel?

What change does this business accomplish in your customers lives?

When is this success happening?  Soon?  After years of grueling hard work?

What will change from your current life as you transition to this successful business?

Think of this as the equivalent of visual imagery in sports.  If you see success in detail in your dreams, it is easier to make that 3 pt. shot off the rim of the basket.

Then, start working backwards.  How do you get to each point in your day dream?  When I first opened my business, I imagined how many clients I would work with.  How often we would interact and what that looked like.

I wanted to do meaningful work.  I imagined talking in front of small groups about taking financial charge of their lives.

How would I convert prospecting into X number of clients?

Do your homework and make a rough estimate based on factual data others in the industry relate.  If you think you can beat it, go for it!

Metrics can move as you gain more insight and data.  A business is always evolving and constantly moving forward with new product(s), marketing, etc and the metrics will change with it.  Get comfortable with uncertainty – this is what developing and growing a top business is all about. 🙂

Finally, get to work!  Set milestones and develop a weekly, monthly, quarterly plan to accomplish your goals and start crossing milestones off the list.

Last note:  Beyond market development, product development and setting pricing structure, I encourage you to think more about your client Onboarding process early.  Set world-class expectations so you don’t churn through your earliest clients with bad service or an unclear path.  Find ways to up-sell, cross-sell and develop these initial clients into raving fans of your business.

Considering leaving your current company to start your own business? Schedule a time to chat with us.

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The above discussion is for informational purposes only. Recommendations are of a general nature, not based on knowledge of any individual’s specific needs or circumstances, and there is no intent to provide individual investment advisory, supervisory or management services.

If you live in a state with it’s own form of state AMT, this further complicates the matter. AMT calculations can be difficult and you may need professional help, such as that of an accountant, tax attorney, or someone experienced in complex tax returns.

Thinking about staying home with the kids? Consider the cost trade-offs.

Taking the step to put your career on pause is not an easy one. It doesn’t matter if it is to become a stay-at-home-parent or to start your own company. Emotions and finances are the main factors in the decision of whether this makes sense for you.

I had lunch with a pregnant friend who is considering staying at home for the first few years before the kids are in full-day school. Because no change happens in a vacuum, she is also considering changing tech careers. Should she switch careers now, or should she stay at home with the kids and worry about the career switch later?

We looked for a quick calculator to think about the dollars lost and found one at the Center for American Progress website. For a 30 year old employee with a salary of $90,000, staying at home for 5 years could lead to a loss of more than $1,138,636 in lifetime income.*

This excludes stock compensation effects or a loss in disability insurance if an accident occurred during that time.

This was way more than she initially considered and it brought up some good points in our chat:

Money as quantitative

Each lost year of employment could cost a family more than three times a parent’s annual salary by:

  • missing out on current paycheck
  • missing out on wage growth
  • loss of current vesting stock options or RSUs (stock compensation)
  • missing out on retirement investments and compounding growth
  • potential loss from no disability insurance coverage
  • loss of good medical coverage and employer paid premiums

Money as qualitative

Each lost year of income could cost a family emotionally by:

  • adding financial stress in making ends meet
  • not being prepared for future hardships or expenses larger than current savings
  • extra stress on partner to maintain stable career
  • feeling financially insecure
  • missing out on hours of early children’s lives
  • providing a less stable environment to children at home
  • not feeling as satisfied outside of work without acknowledged achievements

Each family is different in the tradeoffs and concerns. Some may already have 2 years worth of emergency savings in cash with a large retirement egg. Others may still be saving toward 6 months of emergency savings while trying to save some for retirement and pay-off student loans.

The goal is to be informed and consider all sides of the situation. Do some research and find out what may be best for you. If you’d like help in the process, contact me to discuss a quick-start project to set you up for success in this big decision and life change.

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The above discussion is for informational purposes only. Recommendations are of a general nature, not based on knowledge of any individual’s specific needs or circumstances, and there is no intent to provide individual investment advisory, supervisory or management services.

*The Center for American Progress’ calculator (http://interactives.americanprogress.org/childcarecosts/) considers current lost wages, lost wage growth, and lost retirement investments with compounding growth over an individual’s lifetime.

Our Philosophy

We believe everyone deserves a complete financial plan. A plan that incorporates your values, goals, and finances to help you lead a wealthy life now and build future wealth. 

Our financial plans:

  • define the current factors affecting your ability to build wealth,
  • provide recommendations and a clear framework for tackling your concerns in living a wealthy life, and
  • create an action plan for ongoing progress over our relationship.

Then, we continue to evaluate, implement, and monitor financial changes through ongoing progress meetings.  We review major changes in your personal life, identify your priorities, and review progress toward building your wealth.

Our journey together is about being honest on where you want to go, where you are now, and making a best guess on how to bridge the gap.  We help you balance the trade-offs in what you have to invest: money, time, energy, and skill.

We believe traditional Wall Street doesn’t fit Gen X & Y: the attention you receive should not be based on the amount of your investment assets.

Money decisions are often driven by desires to feel happy, safe and secure. By having a plan that matches your values with how you spend your money, you save time and increase happiness.  Everyone deserves happiness!

Our fee structure is built on the complexity of your current financial situation – not based on your investment assets.

We believe each person and family is different: you should work with someone you can trust and who is an expert in your situation.

It is important to work with a financial advisor who understands your current situation.  Do they have the professional network to assist you with your individual needs and do they understand your major concerns?

We focus on tech entrepreneurs and employees because we understand many of their particular issues:

Do you work for Amazon or Microsoft?

We understand their benefit plans and integrate RSU planning into our financial process.

We also know how to help you transition from the corporate life to a new adventure if this is your main goal.

Do you work for a local early startup? 

If your startup does not have a 401(k) yet or provides limited health benefits, we can help you determine the best options for you.

Want more information on your stock options?  We can help you think about the tax effects of these and make a plan for when to exercise your vested options.

Are you an early stage entrepreneur struggling with cash flow?

We can talk through budgeting, short term debt options, and how to think about your savings during this hard time.

As your career progresses, we assist you with tax planning for founder’s stock, minimizing risk in your portfolio, and protecting your family long-term.

Find out more about us on our About Us page.

Why I created SeedSafe Financial LLC

I am a fan of personal financial education.

I grew up in a self-employed single-mother home, where the highs were amazing and the lows were extremely stressful. I was my mother’s helper in her business and kept track of the business finances in QuickBooks.

In our home, business finances equaled personal finances, and we were often in the red.   The stress this caused in our relationship and our relationships with others was constant.  This period of my life is known as “hormonal teenage years x 10”.  While financially treading water, my mom tried to give us a typical Texas suburb life.

When I arrived at college, I realized I wasn’t alone in my financial confusion.  At my orientation, banks handed out credit card applications and promised a free t-shirt for signing up. Students fumbled through living independently on a budget or worked to make ends meet while attending classes.  None of us knew the best way forward in optimizing our financial situation.  In the case of money, we felt like 1st graders learning multiplication without a teacher’s guidance.

So I dove in and learned as much as possible about personal finance.  I taught seminars on credit scores and what to look for in credit card applications.  I worked as a book keeper for small businesses and developed my tax skills working on tax returns for a regional accounting firm.  Then, I began consulting with self-employed individuals in tax planning for their businesses.

Clearly, this was the time I found my inner tax geek and I never looked back.  I went on to work in public accounting, continued consulting with small business owners, and become a financial advisor.

SeedSafe Financial LLC is the result of my ongoing passion to make financial decisions attainable for Gen X and Y.

We help you figure out your financial options.

My goal is to change the way the financial industry thinks. Instead of doing real financial planning with only $1 million+ clients, I believe we should be proactive in helping you build wealth early on.

SeedSafe Financial LLC meets you where you are (before you are a zillionaire).  We work with Gen X & Y when you have time on your side for small changes to make a huge impact on your life.

Schedule a discovery call with us to learn more!