83(b) elections, early exercise and QSBS: the timing decisions that keep your money

Three US tax mechanics decide how much of an equity outcome you keep. They are all about timing, they are all decided years before any money appears, and two of them have deadlines that cannot be fixed afterwards.

This is an explanation, not tax advice. Rules differ entirely outside the US and the numbers depend on your personal situation. Get an accountant before acting.

1. The 83(b) election

When you receive stock subject to vesting, the default rule taxes you as it vests, on the value at each vesting date. For a founder that is a disaster in a company that works.

An 83(b) election says: tax me now, on today’s value, on the whole grant.

Worked

Founder B receives 4,000,000 shares at incorporation at $0.0001 per share — $400 of value — vesting over four years.

With an 83(b) election, filed within 30 days:

taxable income today = $400
tax on vesting       = none

Without one, and assuming the 409A reaches $0.25 by the first anniversary, the 1,000,000 shares vesting that year are ordinary income:

1,000,000 × ($0.25 − $0.0001) ≈ $249,900 of ordinary income

On stock you cannot sell, in a company with no liquidity, repeated every vesting date at whatever the valuation is then.

The rule that catches people

Thirty days from transfer. No extensions. No late filing. It is one of the very few deadlines in this whole subject with no remedy, and missing it is entirely unrecoverable.

File it, send it by a method that produces proof of mailing, and keep the proof permanently — you will be asked for it in diligence years later.

2. Early exercise

Some plans let you exercise options before they vest, buying restricted shares the company can repurchase if you leave.

Why it is attractive at the moment of grant:

strike price = fair market value
spread       = $0
tax at exercise = $0   (plus an 83(b) election on the restricted shares)

You convert options into actual shares with effectively no tax event, and both the long-term capital gains clock and the QSBS clock start now rather than years later.

Compare with exercising four years in, when the 409A has moved from $0.25 to $2.00, and the spread on 48,000 options is $84,000 of income (NSOs) or AMT exposure (ISOs), as in part 5.

The honest counterweight: early exercise is cash into a company that may fail. 48,000 options at $0.25 is $12,000 you might never see again. Nobody should early exercise money they need.

3. QSBS — and what changed in July 2025

Qualified Small Business Stock can exclude a large share of the gain on eventual sale from federal tax. The One Big Beautiful Bill Act, signed 4 July 2025, changed the terms for stock acquired after that date:

Holding period	Gain excluded
3 years	50%
4 years	75%
5+ years	100%

It also raised the per-issuer exclusion cap to $15 million (from $10 million) and the issuing company’s gross-asset ceiling to $75 million (from $50 million), both indexed for inflation from 2027. Stock acquired on or before 4 July 2025 stays under the old rules: five years, $10 million, $50 million.

Two consequences worth internalising:

The clock starts when you acquire the shares — at exercise, or at early exercise — not when the options were granted. That is the single strongest argument for exercising early in a company you believe in.

Eligibility has conditions, including the company being a domestic C-corporation meeting the gross-asset test at issuance and running a qualified trade or business. Confirm eligibility with an accountant rather than assuming.

The sequence that keeps the most

For a founder or very early employee, in order:

1. Receive restricted stock at a nominal price, or early exercise at strike = FMV.
2. File the 83(b) within 30 days, with proof.
3. Hold. The capital gains and QSBS clocks are running.
4. Before any sale or secondary, check QSBS eligibility and holding period — three years now has value where it previously had none.

Every step is cheap at the time and impossible to retrofit later, which is exactly why so few people do them.

Next

Part 12 is the administration: board consents, grant letters, 409A cadence and the securities rules that decide whether your grants are actually valid.