Exercise 100% of RSAs via 83(b) When Granted

In the vast majority of circumstances with RSAs, exercising 100% of your grant via 83(b) will be the optimal risk/reward decision

Strategy Overview

RSAs are most commonly granted to founders and first employees shortly after the company is formed. At this stage of the company's life, the FMV is typically tiny (fractions of a penny), and the cost to pre-purchase 100% of a grant (via 83(b) election) is typically less than $1,000. In these circumstances, purchasing 100% of the shares immediately upon grant will be the optimal risk/reward decision.

Tax Details

RSAs have somewhat unique tax dynamics in that how they are technically taxed practically never applies, because nearly all RSA grants are 100% early-exercised/purchased via an 83(b) election.

RSAs are most commonly granted to founders and first employees shortly after the company is formed. At this stage of the company's life, the FMV is typically tiny (fractions of a penny) because the "company" is just an idea; nothing has been created so no value exists yet. This typically creates an attractive risk/reward to early exercise:

• The cost to pre-purchase 100% of a grant via 83(b) is typically less than $1,000

• If the company is successful (which is a large motivating reason why you opted to start the company or join as an early employee) the tax savings from early exercise can be much, much larger.

• Tax-wise, if 100% of shares are 83(b) early exercised:

  • No taxation will occur upon grant or when shares vest (because taxation was elected up front via 83(b), even though that resulted in $0 of tax impact)

  • If shares are sold in the future, they'd be subject to capital gains tax rules, and if applicable, the QSBS exclusion

Key Benefits

• Early exercising 100% of RSAs when granted is likely the optimal risk/reward. The cost to purchase is typically less than $1,000, no tax is due when you exercise, and no future taxes will be owed upon vesting. There is still high risk of failure (and loss of your purchase), but the tax benefits/savings if the company is successful can be massive, making the 83(b) exercise the appropriate strategy in most circumstances.

Key Considerations/Flags

• High risk of loss. A startup company has an exceptionally high probability of failure. You should assume that your investment in the shares will be a loss.

• Ensure you file your 83(b) election paperwork correctly. Making an 83(b) election requires filing paperwork with the correct entities (e.g. IRS) within a handful of weeks after you make the election and purchase the shares. Failing to do so can invalidate the election, resulting in a likely far more onerous future tax burden.

Strategy: When to Consider This and When to Avoid It

​🟢When to Consider This Strategy:

• If you're a founder or early employee and granted RSAs with a nominal amount to pre-purchase. In this case, the risk-reward of purchasing vs. not will strongly favor purchasing 100%

​🔴When to Not Use This Strategy:

• If your RSA grant is a rare case where the cost to purchase is large. If you are granted RSAs at a later company stage, the above risk/reward dynamic likely will not apply.

Example

For RSA early exercise example, please see: RSA Taxation/Taxation Examples