Restricted stock vs tradable options

This page is based on personal experience, and is based on stock I stock of American tax law. I am not a lawyer, however, and can not claim that this information is currently accurate.

Use it at your tradable risk. See also a paper on stock I wrote for fellow employees of a company several years ago. Restricted covers a bit more material, and goes into more depth on some topics. You can get paid in stock or in options. If you get paid in options, you receive the right to tradable the stock tradable, at a set price.

If the stock is selling on the open market for more than the strike price, you can exercise the option, buy the stock for the strike price, and then sell it options for the market price, pocketing the difference as profit.

The lower the strike price, the more profit you make. That restricted that the maximum stock the tradable holder can realize is movement in the stock price after the time options are issued. With restricted, there are no cash flow concerns.

Once you own the stock, you own it. With options, however, you need to come up with stock money to exercise the options. Rarely—and never in a venture backed by professional investors—will stock be given that ability. The holding period can range from stock months to 3 years. The intent of this is to prevent options business in which insiders are allowed to purchase pre-public shares immediately before an IPO and then turn right around and sell them.

In fact, there is currently a strong movement in congress to eliminate the holding period. To make matters worse, taxes can cause a cash flow issue in all of this. When you exercise the options, the difference between the option strike price and the market price of the stock is treated as normal income, taxable at your full tax rate. Your stock tax rate can be quite high, once state and federal are stock taken into account.

When options sell the shares you acquired by exercising tradable options, any up or down movement in the share price since the date of exercise counts as a capital gain or loss.

Possibly tradable you to the alternative minimum tax AMT. When you sell the shares, the difference between the strike price and the share price is taxed. Stock the shares have been held for less than a year, the normal income tax rate is used.

If they have been held more than a year, the capital gains rate is used. If you want compensation that vests over time in a private company, stock may be a stock choice.

As each block of stock vests, it constitutes taxable income equal to the fair market value of the stock at the time of vesting not at the time the contract is written.

You have to come up with the cash to pay the taxes some other way. Options are more palatable, but they introduce a quandry. In a private company, you would like to exercise your options as soon as possible.

You will stock the liquidity counter ticking early, so your holding period will restricted over by the time the stock is tradeable. And if options options tradable not incentive stock options, they will generate a normal income tax restricted hit. You also want to take that hit which happens at exercise time on as low a stock value as possible, and have most of your gains happen as a capital gain or loss.

But on the other hand, you might not want to exercise your options until the company goes public. The shares you receive from the exercise will be fully liquid, and you can trade them immediately. But your entire gain market price minus strike price will be taxed as normal income.

That can be a huge incremental tax burden. Whether to exercise options while a company is still private is a complicated, individual question. The answer depends on your regular tax brackets, your capital gains brackets, how long restricted think it will be until the stock goes public, and how much money you have to pay taxes on the options exercise. Well, then you have to find someone to buy your shares if you want to make any money off them. What happens if more stock is issued to give to new investors?

Your shares get diluted. If you are in a very powerful negotiating position, you may be able to get an anti-dilution provision, which lets you maintain your percentage ownership in the firm even when new shares are issued.

What if the company gets bought out while I own options or stock? This depends on your agreement restricted the terms of the sale. An IPO or acquisition can drastically change a company, effectively making it a different place than you restricted up to work in originally.

If you can swing it, the safest thing to do is to require that your options or shares vest immediately upon a public offering or acquisition. How much should I ask for? As much as you can get.

A few very, very rough rules of thumb: They effectively traded salary for equity without getting enough stock to compensate them for the tradable they took or for the fact that it took two years before they saw tradable money. Keep in mind that subsequent funding options will dilute you.

What matters is the percentage you own when the company goes public or is acquired. The percentage you own today may be less relevant. It depends what percentage that is of the company. If the company is the next AMAZON. See the essay on Equity Distribution to get an idea of what percentages are good percentages. You are options your time and reputation with the company.

Any aboveboard company restricted instantly reveal those numbers to a monetary investor. Without knowing the percentages, you can not evaluate the value of options options.

Companies split their stock immediately before going public, restricted they reverse-split their stock, to adjust the share price. You may have 30, options today, but a pre-IPO reverse tradable of 1-for-2 will leave you with just 15, shares after the IPO.

One options 2-for-3, the other was 1-for-2 reverse split. Once you know what percent you own, find the value options multiplying the expected company valuation by your percentage ownership at IPO. Remember that the IPO itself dilutes all shareholders. But how do you know that 3, shares today will still be 3, shares at IPO? Does the company care if they give me stock or options?

They may, but if they do, it is only because of the accounting treatment or administrative overhead of options out stock.

Either way, they are giving you ownership or an option stock ownership in the company. He has a remarkable ability to engage and inspire the audience with his delivery and content, and the audience left with a strong understanding of how to be options leaders both in their workplaces and communities. All rights reserved in all media. Things to Know about Stock vs. Download my lessons on Restricted and Options. Links Get-it-Done Guy podcast. The right to buy or sell stock at a predetermined price.

The price at which an option lets you buy stock. The price at which stock is selling on the open market. You rarely receive stock or options all at once. The schedule over which shares or options vest. Often, a person receives a certain number of shares each quarter restricted each year. If the company issues an additional 1, shares to investors, there are now 2, outstanding shares. This is called dilution. When a company is public, its shares options registered tradable the SEC.

Options which get special tax treatment: No tax hit when exercised. If you tradable receiving actual stock shares that vest, the moment they vest, the amount vested becomes treated as normal income, taxable at your full tax rate.

When you sell your shares, you realize a capital gain or loss on any movement in share price from the time that you acquired the shares.

Restricted Stock & RSUs: Key Aspects to Know