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Recently I was in a conversation with a business owner about the best way to incentivize employees. During the conversation I realized that he was using the terms “Stock Options” and “Restricted Stock” interchangeably. I have come across this issue several times, which inspired me to write this post. In reality, there are several important differences between the two terms. A stock option gives the owner the right to receive stock in the FUTURE, generally for a set price. On the other hand, restricted stock is stock that is issued NOW, but may be lost if certain circumstances do not occur (e.g. remaining an employee for a set time). To illustrate, here are two hypothetical examples demonstrating the difference between the two. Stock Options Abby is an employee of XYZ Inc. She receives an option to buy 100 shares of stock in 2 years for $1.00/share if she remains employed by XYZ Inc. at the end of the 2-year period. What are the consequences? Here, no stock is issued to Abby. Thus, Abby does not have any of the rights that go along with stock ownership, such as the right to dividends (if made), the right to vote, the right to inspect books and records, or the right to bring a shareholder lawsuit against the company. Restricted Stock Ben is an employee of ABC Inc. He receives 100 shares of restricted stock that vest over 2 years (i.e. 50 shares per year). Because he received restricted stock, ABC Inc. actually issues these shares to Ben. Thus, Ben gets the corresponding rights to dividends, the right to vote, the right to inspect books and records, and the right to bring a shareholder lawsuit. Bottom Line. Restricted stock and stock options are not the same. The best choice for a particular company looking to incentivize employees will depend on many factors, including tax factors that are not addressed in this post. For more articles about Finance, Business and Law, please visit www.biztaxbuzz.com
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