Careful consideration should be given to potentially significant tax liability with respect to stock issued to founders, employees and contractors (in lieu of other compensation). Often, startups and emerging businesses issue restricted common shares that provide for time-based vesting. The obvious reason is to retain and reward early employees to drive the growth in revenues (and profits).
Restricted stock grants are usually subject to forfeiture until the first vesting point occurs, say the end of year 1 of a 4 year vesting. At that time, the position of the IRS is that a portion of the risk of forfeiture has passed, and the stock is received as an installment (of value). So long as their remains a substantial risk of forfeiture, the IRS does not consider that value has been received.
If the IRS construes receipt of value at the end of year 1, the recipient pays ordinary income tax on the value of the stock on the vesting date. Thus, if a newer company performs well in that first year, the employees could be subject to a significant and increasing tax liability for that point in time and future vesting, periods. And there is no tax relief for future value declines.
Assuming the company shares are worth little to nothing at the time of issuance of the restricted stock, the taxpayer may elect to be taxed upfront on the stock value at issuance, less any price paid. Thus, an election is made under Section 83(b) of the Internal Revenue Code to pay any tax due. This payment also starts the holding period for long term capital gains treatment on the shares. The critical time to elect 83(b) is within 30 days after issuance. And, the taxpayer must have the restricted stock valued to support his election.