What are the consequences of underestimating the fair market value of a pure startup in an 83(b) election?
Opinions expressed by Entrepreneur contributors are their own.The valuation of a business is never straightforward--particularly not with pure startups where there's no historical way (e.g., earnings or other ratios) to gauge the fair market value. What's particularly concerning are the tax consequences. The greater the discrepancy in value between the compensation income when the founders receive the shares and the value when the stock is sold will increase the long-term capital gain liability. However, by volunteering to pay tax on the value of the stock in the year it is received, the founders may be able to reduce their overall tax liability. Speak to a good accountant who understands 83(b) elections, business valuations, and the ramifications of the choices.