Kevin Criddle

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One of the more important tax decisions founders of early-stage companies will face is whether or not to make an election under Section 83(b) of the Internal Revenue Code for stock awards or other acquisitions of shares subject to vesting. By making this decision promptly upon acquiring the shares, founders can avoid missing the 83(b) filing deadline and protect themselves from significant tax consequences down the line. Below, we have set out six of the most commonly asked questions by our clients:

1) What is a Section 83(b) election?

Section 83(b) of the Internal Revenue Code allows founders, employees and other service providers to accelerate the time for determining taxable income on restricted stock awards or purchases subject to vesting. A Section 83(b) election is made by sending a letter (a sample form can be found here) to the Internal Revenue Service requesting to be taxed on the date the restricted stock was granted or purchased rather than on the scheduled vesting dates.

Founders that decide to make an 83(b) election need to do so promptly to ensure that they do not miss the 83(b) filing deadline. An 83(b) election must be filed with the IRS within 30 days after the grant or purchase date of the restricted stock. The last possible day for filing is calculated by counting every day (including weekends and holidays) starting with the day after the grant date.…
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Despite a recent cooling in the overall investment climate, the number of active U.S. venture investors in Canada has more than doubled over the past five years. This migration north coincides with a climb in overall venture investment activity in Canada, increasingly challenging pricing on U.S.-based deals and a lower Canadian dollar, which depreciated extensively over the same period. According to PitchBook, more than one-third of all venture-backed deals in Canada in 2015 involved foreign capital, and the number of deals that U.S. firms have participated in have more than tripled over the past five years from 44 in 2010 to 143 in 2015.

Canada 2016 VC

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Kevin Criddle
kevin.criddle@dlapiper.com 
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Anthony Kappus
anthony.kappus@dlapiper.com

One of the key considerations in structuring merger and acquisition (M&A) transactions is determining which contracts of the target company, if any, will remain in effect for the acquiror following closing.  This post will briefly outline: (1) the general rules of contract assignment; (2) the effect of anti-assignment clauses and other exceptions to the general rule of assignability; and (3) the effect of four common M&A structures on contract assignment.

General Rule: Contracts are Freely Assignable

The general rule is that contracts are freely assignable unless the contract itself, a statute, or public policy dictates otherwise.  This is true in Washington State, where courts have found that contractual rights are generally transferable unless the contract expressly prohibits assignment in “very specific” and “unmistakable terms.”

Exceptions to the General Assignability Rule

The exceptions to the general rule of free assignability fall into two broad categories: (1) contractual prohibitions on free assignability (“anti-assignment clauses”) and (2) case law prohibitions on free assignability of certain types of contracts that arise out of public policy concerns.

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Criddle.jpgCONTRIBUTED BY
Kevin Criddle
kevin.criddle@dlapiper.com

Successful founders that fail to affirmatively make a Section 83(b) election may face staggering tax consequences years down the road.

The Internal Revenue Code (the “Code”) generally requires founders (or employees) that are granted restricted stock for services to report income as the stock vests.  Accordingly, any increase in stock value beyond the purchase price is recognized at vesting, regardless of sale, and taxed at ordinary rates.

Section 83(b) of the Code, however, allows founders (or employees) to affirmatively elect to be taxed on the value of restricted stock at grant rather than vesting.  Because the purchase price of stock at grant is often equivalent to its fair market value, an 83(b) election typically results in zero recognizable income.  What is more, the election advances the beginning of the one-year capital gain holding period, often resulting in preferential capital gain rather than ordinary tax treatment upon sale.  For an 83(b) election to be effective, it must be filed with the IRS within 30 days of the purchase date.

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