Equity Compensation Highlight: Stock Options and Restricted Stock

April 19, 2022

Start-up and early stage companies commonly offer equity compensation to attract talent, encourage employee retention, and align company and employee interests on business objectives. There are several different types of equity and equity-based awards that a company may potentially utilize. This highlight discusses some of the differences between two common forms of equity awards – stock options and restricted stock.

Key Highlights

  • Stock options and restricted stock are economically different awards. A share of restricted stock is generally a “full value” award, while an option conveys value only with respect to the appreciation above the exercise (or strike) price of the option.
  • The tax treatment of stock options and that of restricted stock is different (e.g., in regards to the taxable amount and the timing of income inclusion, ability to make an 83(b) election, etc.).
  • The situations in which it makes sense to grant stock options and those in which it makes sense to grant restricted stock often overlap, and it may be important to understand the differences and nuances of these two types of awards so that the one that best suits business objectives is used.

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