Equity Incentives

Difference between options and restricted stock

"" is a term often used to refer to shares of of a company that are subject to vesting requirements. The shares are purchased and owned by the shareholder. The shareholder can vote the shares. If a is paid on the shares, the shareholder is entitled to be paid the . However, the shares are subject to vesting. However, if the shareholder ceases providing services to the company—as an employee, consultant, advisor or otherwise—the company has the right to get back any of the shares that were not then vested (typically be paying the shareholder back the original purchase price paid for the shares). With time-based vesting, this means that the percentage of the shares that the company has the right to purchase decreases over time. This is sometimes referred to as "reverse vesting" in order to describe the contrast with vesting of where the number of shares the holder is entitled to purchase increases over time/as they vest.  

A is a contract between the company and an employee, consultant, advisor or other service provider. It gives the individual the right to buy a certain number of shares of at a fixed price, called the . The right to exercise the will vest—typically over time. So initially, the holder cannot exercise any of the shares, but the number of shares that become exercisable will increase over time as long as the individual continues to provide services to the company.

The of an is typically set at the fair market value as of the time of (when the authorizes the of the ). This price is fixed—so even though the value of the may increase, the holder gets to buy the shares at the earlier and lower fixed price. This is the key advantage of an —the individual gets to wait and see how the company does before paying anything out-of-pocket. If the company does well and the increases in value, the holder can exercise the by paying the knowing that the shares are then more valuable than the purchase price. If the company doesn't do well and the decreases in value, the individual can just choose not to exercise the and therefore pay nothing. Compare this to , where the individual must pay for the shares (or pay tax) up-front. Unlike a holder of , however, the holder of an is not a shareholder until the is exercised. Until that time, therefore, the holder cannot vote the shares, and is not entitled to any paid on the shares. 

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