Your first engineer just signed. Their option grant lets them exercise early, and somewhere in the paperwork is a line about an 83(b) election. Nobody explained it. Short answer: if your plan allows early exercise and the engineer exercises unvested options, they have 30 days from the transfer of shares to file an 83(b) election with the IRS, and there is no extension. Miss it and a cheap exercise can turn into a tax bill on every vesting date. As the founder, you do not give tax advice, but you should make sure the engineer knows the clock exists and gets the paperwork in time.
This is about US equity for US taxpayers. It is not tax advice. Your engineer should talk to their own tax advisor before deciding.
What early exercise and 83(b) actually do
Options, vesting, and the normal path
A standard grant gives the engineer the right to buy shares at a fixed strike price, vesting over four years with a one-year cliff. Normally they exercise only vested options, often years later, and pay tax at exercise based on the gap between strike price and the fair market value at that time. If the company has done well, that gap can be large.
Early exercise changes the timing
Some plans let employees exercise options before they vest. The engineer pays the strike price now and receives restricted stock that vests on the original schedule. If they leave early, the company can buy back the unvested shares, usually at the price they paid.
The 83(b) election is the point of it
Without an election, restricted stock is taxed as it vests, on the value at each vesting date. An 83(b) election tells the IRS to tax the shares when they are transferred instead. If the engineer exercises at a strike price equal to the current fair market value, the taxable spread at that moment is often zero. Future growth is then on the capital gains track, and the holding period starts earlier.
That is why early exercise exists for early employees: when the strike price is low and the company is young, paying a small amount now can avoid a much larger tax event later.
The 30-day deadline is the whole risk
The election must be made within 30 days of the transfer of the shares. The IRS does not grant extensions for late 83(b) elections. Late is the same as never.
The trap in practice is not that people decide against it. It is that nobody owns the clock. The board approves the exercise, the shares are issued, the engineer assumes the company handles it, the company assumes the engineer does, and day 31 arrives.
Filing got easier
The IRS released Form 15620 for 83(b) elections in late 2024, and since mid-2025 it can be filed online through an IRS online account, as Goodwin summarized in July 2025. Mailing still works, ideally by certified mail with a return receipt. Either way, the engineer needs to give a copy of the signed election to the company, and keep proof of filing forever. Diligence on a future round or acquisition can ask for it.
Is early exercise right for your engineer?
That is their decision, but you should be able to explain the trade honestly.
When it tends to make sense
- The strike price is low, so the cash outlay is small. Early-stage strike prices can be a few cents a share.
- The engineer plans to stay and believes in the company.
- The exercise is at fair market value, so the 83(b) creates little or no immediate tax.
When it is a real risk
- The cash amount is meaningful for the engineer. They are buying stock in a private company that may be worth nothing, with no way to sell it.
- If they leave before vesting, they usually get their money back for unvested shares, but any tax they paid because of the election is not refunded.
- For incentive stock options, early exercise can have alternative minimum tax consequences. This is exactly where a tax advisor earns their fee.
Being honest here matters for the relationship. As I wrote about paying your first engineer in salary and equity, equity is a real instrument with real terms. An engineer who later discovers that nobody mentioned an option that would have saved them money will remember it.
What the founder should actually do
You are not the engineer's advisor, but you control the process. Five things:
1. Know what your plan allows
Read your equity plan and grant template, or ask your lawyer: is early exercise permitted? Many standard startup plans allow it, but not all. Do not promise it in the offer call unless you know.
2. Say it out loud at offer time
When you walk through the package, mention that early exercise is available, that it comes with a 30-day election window, and that they should speak to their own advisor. One sentence is enough. The point is that it is not a surprise.
3. Assign the clock
Decide who tells the engineer the transfer date in writing. Usually that is whoever runs your cap table, often your lawyer or the cap table platform. The engineer should know the exact date on which day 30 falls.
4. Collect the copy
Ask for a copy of the filed election and keep it with the stock records. Missing 83(b) copies are a known cleanup item when investors review your cap table, along with the paperwork described in the IP assignment that stalls a term sheet.
5. Remember your own
Founders with restricted stock face the same 30-day rule, usually at incorporation. If you are not sure you filed yours, find out now. It is one of the items an investor's lawyer will look for.
A short worked example
These numbers are illustrative. An engineer receives options on 100,000 shares at a strike price of $0.05, the current fair market value. Early exercising all of them costs $5,000. With an 83(b) filed in time, the spread at exercise is zero, so there is no ordinary income to report then.
Two years later, after a priced round, fair market value is $1.00. Without early exercise and an election, the vesting or exercise events in between would be measured against those higher values. With it, the growth is not taxed until the shares are sold. The flip side: if the company fails, the $5,000 is gone.
FAQ
Is the 30 days counted from the grant or the exercise?
From the transfer of the shares. For early exercise, that is when the engineer exercises and the shares are issued, not the original grant date. Confirm the exact date with your lawyer or cap table provider.
Can the company file the 83(b) for the engineer?
The election is the taxpayer's own filing. The company can provide the form, the dates, and reminders, but the engineer signs and files it.
What if the deadline was missed?
There is no late filing. The shares will be taxed as they vest. The engineer should talk to a tax advisor about the consequences. For the company, the fix is process: make sure the next hire does not miss it.
Do we have to offer early exercise?
No. It is a plan design choice. Some companies skip it to keep cap table administration simple. If you are unsure whether it fits your stage, it is a reasonable topic for a call with Fraction alongside your lawyer.