Articles Tagged with restricted stock

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AdobeStock_431953977-300x169A stock option pool has become an increasingly popular tool for startup companies. Entrepreneurs seeking to attract talented employees will often offer incentives that give employees motivation to make the company as profitable as possible, and equity compensation is a very popular option. There are different ways to offer these equity options to employees, and stock options pools are a popular choice. A pool allows a company to set aside a given portion of company stock to be issued to employees as stock options. While this is a convenient structure for many businesses, it is not always the best option. Learn more about the pitfalls of using a stock option pool – and the other options that might be better for your business.

The Difference Between Stock Options and Restricted Stock

Both stock options and restricted stock are forms of equity compensation made to employees. There are different restrictions that come with each form of compensation, and it is important for companies to understand these effects before making the choice of how to offer equity compensation. Restricted stock creates a role more similar to a traditional stockholder, and the employee may vote and receive dividends. Employers may also reserve the right to buy back restricted stock (or at least have the right of first refusal) in order to maintain control of the company. Stock options are more limited. Employees are usually limited to the right to buy company stock at a set price in the future. This right can create a windfall if company stock exceeds the set price, but it does not give the employee voting or dividend rights. Because there are no voting rights and no set number of shares, employers generally do not retain the right to buy back stock options. Both restricted stock and stock options can be subject to vesting requirements in order to encourage long-term employment.

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Issuing equity in a company is a popular form of employee compensation. This trend is especially popular here in Silicon Valley, where startup companies often defer cash compensation to their employees in exchange for a share of future growth through the issuance of equity. If you own a non-public company, you may wish to compensate your employees partially by issuing them equity in the company. Equity aligns incentives between employers and employees while enabling employees to build up wealth over a longer term. Equity issuance can be done in different ways, including by issuing restricted stock grants or by issuing stock options. Each of these forms of compensation can have its own pros and cons and you want to make sure you carefully analyze the decision and decide which is best for your circumstances.

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Restricted Stock

Restricted stock is a stock award that will not fully transfer to the employee until certain conditions have been met. These conditions can include a certain length of time working for your company, meeting certain performance or financial goals or milestones, and more. These restrictions can be helpful for owners to ensure that employees do not simply walk away from your venture and that they must wait for the award to vest before they receive the stock benefits. In addition, by making an 83(b) election with the IRS within a certain period of time after the restricted stock grant, employees can save significantly on the tax burden once the stock vests. If no election is made, however, employees may face hefty tax liability at the time of vesting depending on the value of the shares. Restricted stock is less risky and easier to manage in comparison to regular stock.  However, restricted stock has less favorable tax treatment than options.

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