The 83b Episode
April 17, 2013 Leave a comment
… or me and my six-figure mistake.
You start a company with a couple of guys and it’s really hard to picture it turning into anything more than an excuse to work together for awhile before you go out and get real jobs. Sure you start a real company but ‘exits’ happen to other people. You’ll be happy to build something cool, have some fun and not go broke.
So when we first issued the restricted stock for this particular venture it didn’t feel like a big deal. As always, it was an article of faith that this one, like most startups would amount to nothing. I had to assume that to retain my sanity. It’s easier to tell yourself and everyone else that you’re a psycho who works like a madman because you like it, than to admit that you’re betting a shitload of sweat equity on a super long-shot.
No surprise then, that when it was time to file the 83b election form I prioritized it appropriately. The 83b election is the IRS form you file to get any appreciation on the stock treated as capital gains rather than personal income. And when I say appropriately, I mean I put it at the bottom of the task pile, below laundry and beard trimming. The problem with that approach to the 83b is that you have 30 days from receipt of stock to file it or it doesn’t work. So one day I was driving along and realized that the 83b was laying on the passenger seat next to me, unfiled, and it’d been a lonnnnngggggg time since I’d signed it. An icy chill shot through me. I stopped at the nearest post office and, without actually doing the calendar math, fired it off to the feds (and the state?!), return receipt requested.
Fast forward several years and lo and behold, we’ve done something right and someone wants to buy the company. Suddenly the 83b takes on incredible significance. If I did it right, I pay 15% capital gains on the money. If I screwed it up, I pay 35% personal income tax on it. A difference of 20% – or as we used to say back in Inman Square, six fucking figures.
Now I’m not the most organized guy in the world. If it’s not in source control or my pants pocket (what has it got in its pocketses?), I have no idea where it might be. And the company was not the most organized operation so the paperwork I had was crappy and scattered all over the place. But what I HAD retained in a nice neat little box in my brain was that spear of icy fear that I’d screwed it up – I’d missed the deadline. I was convinced of it.
Worse, I would have to turn the house upside down to find the paperwork and all that effort would merely prove that I was an idiot. And having realized this in the middle of the week, there was nothing I could do about it until I had the time to go through every piece of paper in my office. A sloppy mistake I made years ago cost the family six figures. We didn’t have six figures to give away.
Mrs Pointy-Hair found me sitting at the kitchen table that first day. I told her I was worried. Mrs. PH and I have been together for a long time, through our share of ups and downs, and that’s the first time I ever said that to her. I’m not a worrier.
That Saturday I sat for seven hours sorting through 10 years of tax returns and every loose piece of paper in my office. The 83b showed up right after lunch, dated September 21st. Then a few hours later, a return receipt signed by the nice man at the IRS office. October 19th. 28 days. Sloppiness had nearly cost me six figures. I’d done a shit job getting the 83b in on time, and I’d paid no attention to the return receipt, just threw it in a file and forgot it. How close I skated to the edge of that abyss is appalling.
But you don’t come here just to see me confess the occasional sin and shred startup CEOs and glibertarian developers. Come for the entertainment, but stay for the education. So without further ado, the several lessons to be drawn from this sordid episode:
- Memory sucks, mine more than most. I can draw up the network map of a data center I haven’t seen in ten years but I remembered the formation of the company, the transfer of stock and much of the action at the company wrong – completely wrong. In one case, I was looking in the wrong boxes because my recollection of an event was off by two years. As I sifted through the paperwork it was clear that stuff I thought had happened one way really hadn’t. It was like reading about someone else’s life.
- Being generally correct is better than precisely incorrect, but being precisely correct is even better. Who knows, if I’d prioritized 83b ahead of something else that might have started a chain reaction and we might have missed a contract milestone and lost the business right off the bat. Right. Measured precisely, it was still higher priority. And if I’d read up on 83b at the time I would have filed away the “nailed it” feeling when the return receipts showed up.
- Here’s one for the ladies: Don’t marry a guy who makes up convoluted rationalizations for not sweating the details.
- Sloppiness kills. If I’d had one more layer of crappe on top of it on the passenger seat, I wouldn’t have seen the 83b in time. If I hadn’t been driving by a post office (those things are EVERYWHERE!) I might have put it off again.
- Whatever it is, do it now. Really, how fucking hard is it to go to the post office?
The most important lesson of all though is choose wisely – in this case choosing your partner. That came with Mrs. Pointy Hair’s reaction to the (incorrect) news that I’d pissed away a house or two by not going to the post office on time. She listened patiently to my confession and simply said:
Well, it’s still a lot of money.
And she was right. Capital gain or personal income, it WAS a lot of money. And I love her for realizing that when it mattered, not years later when it wouldn’t.