It is easy to see how employees receiving restricted shares and making a Section 83(b) election can benefit if the price of the stock rises between the grant and vesting dates. An 83(b) election may appear especially appealing to (early stage) startup employees who tend to be (preter) naturally optimistic about the prospects of their employer companies. However, the benefits of a Section 83(b) election – especially after consideration of the risks involved – may be less significant than originally anticipated. Three conditions (often outside the control of the employees) must be met for an 83(b) election to provide a (risk-adjusted) advantage: (1) Securities awarded as compensation have relatively low values at the time of grant; (2) the exit event for the employer company, or other transactions that may provide liquidity to the employees, occurs at relatively high implied valuations; (3) employees remain employed at the granting company until the awards vest. This blog post will primarily address the first condition.
