The 83(b) Election That Almost Went Missing

This is a story about a document that almost disappeared, and why it should never have been at risk in the first place.

The situation

A client of mine was preparing for a financing. As part of diligence, the investors’ counsel asked for the founders’ 83(b) elections and proof that they had been filed.

For founders who receive stock subject to vesting, an 83(b) election is an election under U.S. tax law that generally has to be filed with the IRS within a short, strict window after the stock is issued. Missing the deadline can have significant tax consequences, and once the window has closed, it can’t simply be redone. Because of that, investors want to see the signed election and evidence that it was filed on time.

The founder couldn’t find it.

He searched his own records. Nothing. The lawyer who had handled the filing at the time had since left the firm. The documents that would normally prove the filing, the signed election and the related paperwork, weren’t where anyone expected them to be.

The stress

It’s hard to overstate how stressful this is in the middle of a financing. A missing 83(b) election isn’t an administrative inconvenience. It raises questions about a founder’s tax position, and the answer can’t be negotiated or recreated after the fact. Everyone involved, the founder, the company’s counsel, and the investors, needs to know whether it was filed correctly.

Eventually, they found it and retrieved it. The financing moved forward. But the search cost time, attention, and anxiety at exactly the point in a raise when all three are in short supply.

What should have happened

The frustrating part is how simple the prevention would have been. At the time the election was signed and filed, if the lawyer or the founder had simply sent a copy to the company’s records, it would have been saved permanently, in a place that doesn’t depend on any one person’s inbox or any one firm’s files.

That’s the lesson I take from it. The most important documents are often signed once, at the very beginning, when nobody is thinking about diligence. And the people who hold them move on.

Why did it happen? Not because they were messy or didn’t care

The early stages of a company are the busiest time for founders. They wear many hats, and they work under tight budgets, both in time and in money. They can’t afford a corporate secretary or in-house counsel to manage their corporate records. That doesn’t mean they don’t need one, or wouldn’t benefit from one. They do, and they can pay a heavy price when mistakes from this period surface later.

In all my years working with small companies, it was clear that many of them cared about having organized, properly kept corporate records. But it was a luxury, again in both time and money. It was a risk they absorbed, hoping that one day they could hire someone to look back and fix the issues. The problem is that some of those issues can’t be fixed by going back in time, and they can damage the company’s future. A missing 83(b) election is one of them.

These things don’t happen because founders don’t care or are disorganized. They happen because founders simply don’t have the bandwidth to give these matters the attention they deserve. That’s a real problem, and the solution shouldn’t be to wait until the company can hire a general counsel to fix it.

How to keep your records safe and organized, and reveal gaps, without the time or budget

Technology is your best friend here. Document management systems designed specifically for corporate records, and for small and medium-sized businesses in particular, can do in the early stages what a founder can’t. On a very low budget, you can have a system that organizes everything for you. All it takes from you is to drag and drop documents, or simply email them into your corporate vault, and your corporate records stay as well kept as if you had hired an experienced corporate secretary. It’s even better if the system runs health checks and gap analysis, so missing items and red flags appear as they arise and you can address them before they matter.

This post shares general information, not tax or legal advice. If you have questions about your own 83(b) election, talk to your tax adviser or counsel.

How DocChief helps

Every DocChief data room has a unique email address and secure upload link. When a critical document like an 83(b) election is signed and filed, the founder or the lawyer can forward the email straight to the company’s corporate vault. It goes directly into the folder it belongs in, next to the founder’s stock purchase agreement, and stays there no matter who changes roles, firms, or inboxes.

Related guides

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Email to Data Room: Collecting Documents by Email Without Losing Them
Where Company Documents Actually Live (and Why That’s a Problem)