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83(b) Election and Restricted Stock Awards - YouTube
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and welcome back we're going to continue
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with our wealth building theme
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once again talking about equity
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ownership in the company which can be
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one of the most powerful ways to build
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wealth
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in our last video we talked about
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restricted stock units
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which we mentioned are a very popular
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way for typically publicly traded
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companies to
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incentivize and reward key employees
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in this video we're going to be talking
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about restricted stock awards
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and specifically the 83b filing election
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which can be a
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very significant way to save
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tremendously on taxes
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and i reference the rsu's because
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there's a lot of similarities to rsu's
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and rsas
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there are some very important
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differences between them as well which
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of course we'll touch on
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it's important to remember rsas are
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oftentimes associated with
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privately held companies so it can be a
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particularly great way for early stage
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employees to gain equity ownership in
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the company
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see a lot of times where startups so if
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you're a publicly traded company
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probably check out the rsu video if
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you're a privately
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owned company you're gonna be happy
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right here learning about the
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rsas as well as again that really
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important 83b
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filing election as i usually do i think
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it's helpful to review this
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through an example so let's go through
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and showcase
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uh what exactly these are now i think
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it's
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helpful to start with rsu so even if you
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haven't seen the last video i'll go
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through these uh quickly because they do
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complement
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so well with what the rsas are that i
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think it's a great framework to start
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with and then build off of
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so with rsus um there's a couple
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key dates to be aware of and these dates
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are the same for rsas
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as well we have the grant date
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we have the vesting date and ultimately
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we likely have a sale date
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uh associated with these shares so with
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the shares
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um again with rsu's typically going to
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be through a public company so these are
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often times tradable through the open
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market
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um and let's but actually we'll just you
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know we'll just make up a company and
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we'll say it's a ten dollar per share
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company
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make it a little easier on me um so with
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the grant date you're you know you've
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just joined the company
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and as a way to incentivize you they say
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we're gonna provide you a hundred shares
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and in this particular
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case they're trading at ten dollars per
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share so call it a thousand dollars in
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this example
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of an incentive for joining uh but we're
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going to lock that up
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and typically with vesting there's
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either time-based investing or there
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might
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be performance-based vesting i always
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just need to read through the
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documentation to understand what exactly
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it's going to be
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but let's just say in this example they
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say it's time-based
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and they say you know you have to be
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with the company for over a year
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in which case you'll receive all of
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those shares for example
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so now what happens is you know you even
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though these shares have been granted to
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you you really don't own them
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until the vesting has occurred so in
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this case we'll say
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you know between the grant date and the
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vesting these shares have now
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appreciated
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up to 15 dollars per share so that year
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hits
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and you now have 100 shares at 15 per
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share
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that's 1500 in value that has become
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yours
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and because that now has become yours
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because the shares have vested and you
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now own those shares
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that fifteen hundred dollars will be
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taxed as ordinary income
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okay so that's just as if you received
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another paycheck for example
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uh it's taxed exactly the same way so
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whatever tax bracket you fall into
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it's going to be that top tax rate that
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these uh these
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uh awards or units are now
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tax at so you have the option
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once these shares become yours of either
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holding them
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and you know ideally they could continue
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to grow or turning around and selling
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them
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you know neither taking the cash or
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reinvesting them into another investment
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opportunity it's really whatever you
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want at that point because they are your
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shares
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so you'll recall if you hold these
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shares for greater than a year
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they receive favorable long-term capital
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gains treatment and long-term capital
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gains
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are taxed more favorably than ordinary
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income
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if you hold the shares for less than one
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year
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you receive short-term capital gain
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treatment
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uh and that is taxed as ordinary income
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so those are one in the same
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so it's unfavorable tax treatment you
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don't get the benefit
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and really what that means is any growth
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so again this was at 15
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per share any growth here
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over the course of a year so let's say
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if that went to twenty dollars
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the five dollars in gains that would be
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taxable
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if it's held for over a year is going to
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get more favorable tax treatment
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whereas if that five dollars happened
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and you sold those shares in less than a
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year
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it's going to be taxes ordinary income
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so
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really helpful framework just to start
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with so that's how the rsus work at a
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pretty high level
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kind of move pretty quickly through that
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if you want to see a deeper dive be sure
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to jump into the video i'll put it at
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the end of this video where you can
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click next
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to go right into it but just kind of a
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high level framework because this is
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going to complement very well with the
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uh restricted stock awards um that
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privately held companies are often
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providing as an incentive to
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employees all right so let's uh
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erase this here
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and now switch over to rsas
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so there are a couple of very important
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differences
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uh with rsas between rsus
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the first of which is recall that rsus
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are typically publicly traded companies
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so there's already a market
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for the shares that are being provided
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to those employees
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in this example i said you know that was
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a ten dollar per share
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uh market already available right off
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the bat
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well with a private company especially a
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new private company
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there may be no market the shares may be
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illiquid
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and it's not uncommon that let's say you
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had a hundred shares again just to stick
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with the same example
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but instead maybe they're only valued at
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a penny each just because there's no
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market for those shares right now i mean
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maybe this is just really
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the hopes and dreams of a new business
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so you know obviously typically there's
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going to be more shares involved and
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that type of thing but just sticking
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with the same type of example
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that's a really key starting point and
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the next key piece is the same process
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really happens there's a vesting
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schedule again that could be time it
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could be performance pretty common it's
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time
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when it comes to the rsas but let's just
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say in the same capacity you had to be
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with the company for over one year
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but now here's where things get
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interesting so in
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the rsu case when those shares vested
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you owed taxes on those shares
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now in our example it was fifteen
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hundred dollars um of gains you know
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let's say it was taxed at a thirty
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percent rate
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not super expensive a lot of people
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would pay that right out of their
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own cash flow but let's say you had a
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significant amount of shares where maybe
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it was 50
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000 worth of you know shares that were
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coming to you so that tax would have
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been a lot more significant
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well recall with rsu's you can actually
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have the company withhold a portion
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of those shares to pay the taxes on your
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behalf i covered that in the last video
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well what happens here though uh you
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know let's say
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these vested and again let's just say
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there's a lot more shares here
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let's say the price you know has jumped
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up to
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just to make it easy you know dollar per
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share um
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and you know so maybe had ten thousand
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shares now it's uh
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let's just say it's ten dollars per
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share and all of a sudden this was worth
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a hundred thousand dollars
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um which would have been great a lot a
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lot of good things happened pretty
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quickly for that to happen in under a
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year
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um or in about a year but you know now
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you have a hundred thousand dollars and
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this is
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all taxable again at ordinary income
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um and so that could be trouble
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if you're you know depending on what tax
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bracket you're in how are you going to
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pay for that these shares
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again it's a private company these
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shares might not have any
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one to sell to so that becomes tricky in
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its own right
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you know now you got to figure out
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where's that cash gonna come from which
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can be problematic
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might even have to take out a loan
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literally just to pay the taxes
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um so you can see how this could get
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into a very tricky situation
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fairly quickly and ultimately um with
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the sale piece
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you even though these shares have now
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vested you may not be able to turn
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around and sell them again there's no
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there might not be a marketplace for
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them
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uh so this sale here may actually happen
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when your company gets bought or sold
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and you go through a liquidity event and
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actually a new company takes on the
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ownership and they're buying out your
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shares so potentially could be the case
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but in any event you can see how the
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private nature of this business has
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posed some problems
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uh for for you from a tax standpoint um
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and just from
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the taxation of how uh those shares are
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going to be treated
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well with this in mind enters the
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83b election so the 83b
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election really helps solve some of
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these
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problems um in a very meaningful way
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and so what ultimately happens with the
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83b
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is you have the option
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to instead of pay um ordinary
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income taxes here when these shares vest
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you have the option to now pay them up
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front
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over here uh when these shares are
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granted so let's just stick with the
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same thing
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so a few benefits here um that you can
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see
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number one you know paying for them at
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this point
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uh might be a negligible payout you know
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if they're at a penny per share for
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example you know even if you have a
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significant number of shares
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that might not be a very burdensome uh
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tax liability to have to pay
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okay so that could be a real benefit and
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number two
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is now if you're paying the ordinary
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income tax here
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that means any future growth
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uh instead of it being subject to
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ordinary income
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could be subject to long-term capital
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gains
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you know if you've held those shares for
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over a year and remember
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long-term capital gains are
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significantly more favorable than
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short-term capital gains
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so you have not only a lower tax basis
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that
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you've had to pay up front on the
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ordinary income side but now any of the
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growth associated with those shares
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which could be significant
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you're going to have more favorable tax
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treatment on the back end
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so the the 83b election allows you to
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obtain those benefits a couple very
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important things to know about the 83b
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election is
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it has to be filed 30 days after your
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grant date
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so absolute requirement you cannot miss
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that window and
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it's uh this date which is really
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important the grant
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date so let's just say it was 1 you know
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01
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2020 for example here's what can be
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kind of confusing uh and and can really
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create a
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a need for a sense of urgency say your
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board of directors comes out with you
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know hey we're going to grant them these
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shares
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and you know by the time the grant date
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actually happens to you receiving the
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information you know all the
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documentation
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and understanding a lot of time may have
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lapsed
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so it's not the day that you receive the
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information and get it it's the actual
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grant date
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you know and so maybe a couple weeks
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have gone by and all of a sudden you're
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gonna have to turn around and make this
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filing pretty quickly because again you
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cannot miss it
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and you should definitely talk to a tax
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advisor about helping you with the
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filing
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making sure that you're doing it
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correctly but that is a really important
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piece i've seen people miss
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is you know hey i received all these
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documents i think i have 30 days from
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getting it
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but lo and behold in those documents
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they tell you the grant
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date that actually took place was a few
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weeks back
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there's something to be aware of um so
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it has to be
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30 days after the grant date that that
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gets filed with the irs
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again your tax advisor should be able to
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help you with that and
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what you're doing there is you're
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basically changing
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the starting point to the grant date
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as when that will be ordinary income and
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now you have the benefit of long-term
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capital gains
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assuming you hold it for over a year
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which is likely the case if it's you
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know especially an early stage company
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for any of the back end tax benefits now
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you might be asking like why wouldn't
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everyone do this you know i already
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talked about the problems that can
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happen
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with vesting and having to pay ordinary
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income taxes but there might not be any
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marketable
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um you know marketplace for those shares
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so now you have to come up with the cash
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to pay the tax and
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all the problems that can present you
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know obviously this 83b sounds
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amazing because you've solved for a lot
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of those problems by paying those taxes
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up front
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well it's not always the case that the
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shares would be
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you know for example only worth a penny
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so one of the
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one of the things like the be carefuls
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is you know in a situation where maybe
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this was already ten dollars per share
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and you still say hey there's in my head
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there's potentially a ton of upside
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and i'd rather get all of that upside
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tax at more favorable rates
[812]
as opposed to ordinary income you might
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be still thinking you want to do the 83b
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election
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but remember you know there could be
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risk involved too so
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if those sh if those shares went from
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you know for example ten dollars that
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you paid up front
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and something happened the cat company
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were actually down the road
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and use the opposite example they were
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only worth a penny
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well you just paid all those ordinary
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income taxes up front
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uh for now a situation that would be
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significantly worth a lot less
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right so you can see how there can be
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some time
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some times where you may be second
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guessing if you want to move forward
[849]
with this or you may want
[850]
to even reconsider but ultimately in
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many many situations especially with
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early stage companies
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the 83b election is going to be
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extremely favorable
[860]
and can do a lot of good when it comes
[863]
to saving
[864]
money from uncle sam and keeping it in
[866]
your pocket
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so you can see rsas there's a lot of
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similarities to the rsus
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and the major differences is really the
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marketability
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of those shares and the 83b election
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applies to the rsas and did not apply to
[881]
the rsus
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so just really important to know that
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distinction and you can see how
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powerful and valuable that election can
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be now obviously all the usual
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disclaimers exist
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um you know this is not meant to be tax
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advice or investment advice
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as i've mentioned repeatedly please
[897]
consult your tax advisor before moving
[900]
forward with these types of strategies
[901]
and if you have further questions please
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don't hesitate to reach out to me
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uh you can either ask questions in the
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comments or reach us directly
[909]
at drivenwm.com which is always one of
[912]
the easiest ways to get us
[914]
and feel free to send that information
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and we love talking with you and hearing
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from you
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and hope you enjoy the content and we'll
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see you again soon
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