Tax Planning for San Francisco Startup Founders and Equity Holders

When you receive restricted founder shares subject to vesting, IRC Section 83(a) taxes each tranche as ordinary income when it vests, at its value then. For a founder receiving 1 million shares at incorporation when fair market value is $0.001 per share, the value at purchase is negligible. Skip the 83(b) election, though, and the shares that vest after a Series B at $5 per share are taxed at $5. On 250,000 shares that is about $1.25 million of ordinary income. At 37% federal plus 13.3% California, the tax is about $629,000, with no liquidity to pay it.

The 83(b) election must be filed within 30 days of receiving the shares. It moves income recognition to the purchase date, so all later appreciation becomes capital gain, long-term once you have held the shares more than a year. You can file IRS Form 15620 online through the IRS website after an ID.me sign-in, or mail it by certified mail to the IRS center for California residents (Ogden, Utah). Use one method, give the company a copy, and keep the confirmation. You no longer attach a copy to your Form 1040.

IRC Section 1202 excludes federal tax on gain from qualified small business stock. For stock issued after July 4, 2025, the exclusion is 50% after three years, 75% after four and 100% after five, capped per company at the greater of $15 million or 10 times your basis, and the company's gross assets must have been $75 million or less when the stock was issued. Stock issued on or before July 4, 2025 keeps the old rules: a $10 million cap, a $50 million asset test and a five-year holding period. In both cases the stock must be in a domestic C-Corp and acquired at original issuance.

California does not conform to Section 1202 and has no state QSBS exclusion. A San Francisco founder who sells stock with $10 million of excluded federal gain still owes California tax on all of it, roughly $1.33 million at the 13.3% top rate.

Some founders consider moving to a state without income tax, such as Texas, Florida or Nevada, before a liquidity event. California's Franchise Tax Board closely audits residency changes made near an exit and looks at where your home, family, work and time actually are. A move that happens a few months before signing is easy to challenge. Planning should start well before an expected sale, and the move has to be real.

Incentive Stock Options (ISOs) under IRC Section 422 receive preferential tax treatment: no ordinary income at exercise (though the spread can trigger Alternative Minimum Tax), and gains are taxed at long-term capital gains rates if you hold the shares for at least one year after exercise and two years after grant. Non-Qualified Stock Options (NSOs) trigger ordinary income at exercise equal to the spread between the exercise price and FMV. For San Francisco founders and early employees, the AMT impact of ISO exercises is a critical planning variable. The AMT spread (FMV minus exercise price) is added to your alternative minimum taxable income. If you exercise ISOs on 50,000 shares with a $1 exercise price when the FMV is $10 per share, the AMT spread is $450,000. At the 28% AMT rate, that spread alone adds roughly $126,000 of tentative minimum tax, before the exemption and the 26% bracket. Any AMT paid generates an AMT credit that can be used in future years when your regular tax exceeds your tentative minimum tax. The planning strategy is to exercise enough ISOs each year to stay below the AMT threshold or to exercise in a year when you expect lower regular income. California has its own AMT at 7%, which also picks up the ISO spread. Starting in 2026, OBBBA made the federal AMT exemption phase out at lower incomes and twice as fast, so more founders with large ISO exercises will land in AMT. We model these scenarios for clients each year before they exercise.

California's 13.3% top marginal rate applies to income over $1 million and includes the 1% Behavioral Health Services Tax (formerly the Mental Health Services Tax). California has no preferential capital gains rate. Combined with the federal 20% long-term capital gains rate and the 3.8% net investment income tax under IRC Section 1411, a San Francisco founder selling equity faces a combined top rate of about 37.1% on long-term gains and over 50% on ordinary income such as vesting stock without an 83(b) or NSO exercises.

San Francisco has no local personal income tax. Its gross receipts tax applies to businesses operating in the city, with a small-business exemption that most individual advisors fall under; founders with large consulting or advisory income should check whether they need to register.

Timing tools worth knowing:

• Installment sales under IRC Section 453 can spread gain over several years, though California taxes it at the same rate whenever it is recognized.
• Qualified Opportunity Zone deferral under the original rules ends December 31, 2026. OBBBA created a permanent replacement program for investments starting in 2027, with a new round of zone designations.
• Donating appreciated shares to a donor-advised fund before a sale is agreed avoids tax on that gain and gives a deduction at fair market value, subject to percentage limits.

Moving out of California does not end California tax on equity you earned while working there. California taxes nonresidents on California-source income, and for equity compensation the Franchise Tax Board allocates income by workdays. FTB guidance for nonqualified stock options uses the ratio of California workdays to total workdays between the grant date and the exercise date. For restricted stock units, the Office of Tax Appeals has upheld a grant-to-vest allocation.

For example, a hypothetical employee who received NSOs, worked 400 days in San Francisco and then 200 days in Austin before exercising with a $300,000 spread would have two-thirds of the spread, $200,000, treated as California-source income on a nonresident return. Texas would tax none of it.

Capital gain from selling shares is different. Gain on stock is generally sourced to your state of residence at the time of sale, which is why the residency date matters so much for founders who hold shares rather than options. To make a move stick, keep records showing the change: a new home, driver's license, voter registration, bank accounts, doctors and where your family lives, plus a daily calendar of work locations. The FTB asks for exactly these items in a residency audit.

Most equity tax mistakes are avoidable with a short review each November or December. The checklist we use:

1. Confirm an 83(b) was filed within 30 days for every restricted stock grant or early exercise during the year, and that the company has a copy.
2. Get the current 409A value before exercising any ISOs, then model federal AMT and California's 7% AMT on the spread before you decide how many to exercise.
3. Check estimated taxes. Federally, paying 110% of last year's tax avoids an underpayment penalty if last year's AGI was over $150,000. In California, installments are 30% in April, 40% in June and 30% in January, and taxpayers with California AGI of $1 million or more must base them on the current year's tax.
4. Record QSBS facts for each lot: issue date, holding-period start, price paid and the company's gross-asset representation at that financing.
5. Keep a work-location log if you travel or plan to move, because California sources option and RSU income by workdays.
6. If you plan to give appreciated shares to charity, do it before any sale agreement is signed.

None of these takes long, and each one prevents a much bigger cleanup later.

Equity tax planning is a multi-year process that starts at formation and runs through exit. We build projection models for San Francisco founders that combine the vesting schedule, expected financing timeline, option exercise plan and possible exit values, then update them when the company's 409A value, the founder's situation or the law changes.

The order of operations is usually the same: file the 83(b) on day one, confirm QSBS eligibility at each financing, plan ISO exercises around AMT each year, and decide on residency and charitable moves well before a term sheet. Rules here were checked October 17, 2026, and this is general information, not tax advice for your specific facts.