How do restricted stock and stock options differ

Stock Options vs. Restricted Stock Units: What's the Difference?

 

how do restricted stock and stock options differ

Stock options and restricted stock units (RSUs) are both forms of equity compensation offered in some hycukofu.tk: Lance Cothern. how do restricted stock and stock options differ RSUs (or Restricted Stock Units) are shares of Common Stock subject to vesting and, often, other restrictions. In the case of Facebook RSUs, they were not actual Common shares, but a “phantom stock” that could be traded in for Common shares after the company went public or was hycukofu.tkcted stock constitutes shares granted to a . Aug 28,  · The restricted stock units can also be structured in such a way you can have all the benefits of stock options. In this sense, between RSU vs stock options, RSUs are more versatile than stock options. The final major difference between RSU and stock options is the way they are taxed. The RSUs are taxed based on the ordinary income rates.4/5(2).


Stock Options Vs. Restricted Shares | Finance - Zacks


Expertise from Forbes Councils members, operated under license. Opinions expressed are those of the author. Share to facebook Share to linkedin Shutterstock Often, when an employee accepts a job with an early-stage company, or even a later-stage company, in addition to standard cash compensation, equity compensation can be a powerful tool to attract top talent. Equity is broadly defined as an ownership stake in the company. Equity compensation can be issued to the employee in a few different forms.

For the purpose of this discussion, we'll assume that the company is a private, non-public, C-corporation the most conventional entity structure for venture-backed businesses and discuss the two most common forms of equity compensation: restricted stock and stock options.

While these two types of equity issuances aim to accomplish the same thing — offer the employee an opportunity to own part of the business — they function very differently. So, what is the difference? As a preliminary note, both restricted stock and stock options may be subject to vesting. Vesting can either occur via the lapse of a company granted repurchase right or via an additional grant.

Vesting may occur due to the passage of time typically contingent on ongoing employment or upon the meeting of certain milestones, which may be company or employee related. What is restricted stock? Restricted stock represents actual ownership within a company, how do restricted stock and stock options differ. Restricted stock grants you all of the same rights, privileges and responsibilities as any other owner of the same class of shares.

This typically includes the right to dividend distributions should the company issue dividends and the right to vote at the annual meeting. In other words, as an owner of restricted stock, you likely have the same ownership rights as the founders of the company.

Why issue how do restricted stock and stock options differ stock? You often see restricted stock issued in the early stages of a business, where the company still has nominal how do restricted stock and stock options differ. Once a company builds value, issuing restricted stock to employees becomes complicated, as you are issuing something of value — the value of which the IRS will likely tax as income to the employee.

This could result in burdensome tax implications for recipients. Enter stock options. What is a how do restricted stock and stock options differ option? Unlike restricted stock, an owner of a stock option does not have an actual ownership interest in the company at the time of issuance, how do restricted stock and stock options differ.

A stock option is an agreement between the company and the employee that grants them the option to purchase company stock for an agreed-upon price. The employee receiving the option does not have voting rights today, or rights to any dividends or any other privileges that may come along with stock ownership in a company.

However, the employee, upon exercise of the option and payment of the strike price, receives restricted stock and thereby obtains the benefits discussed above. Note that the payment referenced above can often be made in a variety of ways, some that involve a cash outlay and others that do not. Why issue stock options? The most prominent answer is to limit the tax consequences to the employee receiving the options.

This is easiest to explain via an example. Not many people can afford the tax consequences of this liability out of pocket. It is important to note further that the stock is not yet liquid; it cannot be sold to create immediate value, which is often overlooked by the parties. Instead, the company issues the employee a stock option.

The employee receives nothing of value today. To sum up, stock options should be issued when a company begins to have value, and the issuance of stock, rather than options, would be so burdensome on potential employees that it would nullify the benefits of issuing equity to employees. There are many details to be considered with restricted stock and stock options, and this post is solely intended to provide a basic understanding of two forms of equity compensation.

Further, this post is not intended to provide legal, financial or tax advice, and if you are considering an issue regarding the topics discussed in this post, you should seek legal, tax, financial or other business counsel to help you make the right decision.

 

Stock Options vs RSU - The Ultimate Guide

 

how do restricted stock and stock options differ

 

Jun 29,  · Restricted stock and RSUs are taxed differently than other kinds of stock options, such as statutory or non-statutory employee stock purchase plans . Stock Options Vs. Restricted Shares. The value of a stock option is the current price of the stock less the option strike price. Restricted shares are shares of the company stock that vest to an employee over time. They are restricted in the sense that an employee cannot sell them until the shares vest. Aug 28,  · The restricted stock units can also be structured in such a way you can have all the benefits of stock options. In this sense, between RSU vs stock options, RSUs are more versatile than stock options. The final major difference between RSU and stock options is the way they are taxed. The RSUs are taxed based on the ordinary income rates.4/5(2).