What’s the Difference between Stock Options andRestricted Stock? | BizTaxBuzz by Trevor Crowbiztaxbuzz.com/bizlaw/whats-th...
What’s the Difference between Stock Options and Restricted Stock?
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What’s the Difference between Stock Options and Restricted Stock?

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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.

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What’s the Difference between Stock Options and Restricted Stock?

  1. 1. What’s the Difference between Stock Options andRestricted Stock? | BizTaxBuzz by Trevor Crowbiztaxbuzz.com/bizlaw/whats-the-dif f erence-between-stock-options-and-restricted-stock/17thJuneWhat’s the Difference between StockOptions and Restricted Stock?Posted by Trevor CrowRecently I was in a conversation with a business owner about the best way to incentivize employees. Duringthe 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 dif f erences between the two terms.A stock option gives the owner the right to receive stock in the FUTURE, generally f or a set price. On theother hand, restricted stock is stock that is issued NOW, but may be lost if certain circumstances do not occur(e.g. remaining an employee f or a set time).To illustrate, here are two hypothetical examples demonstrating the dif f erence between the two.Stock OptionsAbby is an employee of XYZ Inc. She receives an option to buy 100 shares of stock in 2 years f or $1.00/shareif she remains employed by XYZ Inc. at the end of the 2-year period. What are the consequences? Here, nostock is issued to Abby. Thus, Abby does not have any of the rights that go along with stock ownership, suchas the right to dividends (if made), the right to vote, the right to inspect books and records, or the right tobring a shareholder lawsuit against the company.Restricted StockBen is an employee of ABC Inc. He receives 100 shares of restricted stock that vest over 2 years (i.e. 50shares 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, andthe right to bring a shareholder lawsuit.Bottom Line. Restricted stock and stock options are not the same. The best choice f or a particular companylooking to incentivize employees will depend on many f actors, including tax f actors that are not addressed inthis post.

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