Stock options vs stock grants

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When a company issues stock grants, it either gives you shares or, as is usually the case, promises to give you shares provided you meet certain conditions.

Those conditions may be time-based, such as remaining with the company for a certain period, or performance-based, such as meeting sales targets. Grants with conditions are referred to as "restricted.

The tax treatment of stock grants is fairly straightforward. At the time shares vest, the stock grants vs stock options market value of the stock will be taxed as ordinary income.

When a company issues stock options, it is giving you the right to buy shares later on at a specific, predetermined price. If this "strike price" is lower than the share price of the stock at the time you exercise the option, then you get to buy stock at a discount.

If the share price is lower than the strike stock grants vs stock options, the option is worthless. However, you aren't required to exercise the option -- that's why it's called stock grants vs stock options "option.

You might stock grants vs stock options an option, but you can't exercise it for, say, two years. The tax treatment of stock options depends on whether they are "incentive stock options" also called qualified or statutory options or nonstatutory options. With incentive options, you generally incur no tax when you stock grants vs stock options the option or when you exercise it. When you sell the stock later, capital gains tax will apply to the difference between the strike price what you paid for the stock and the sale price what you got when you sold.

With nonstatutory options, you incur no tax when you receive the option. When you exercise the option, the difference between the strike price and the share price -- your discount, in other words -- is taxed as regular income. When you sell the stock, the difference between the sale price and the share price when you exercised the option is treated as a capital gain.

Using stock rather than cash to compensate, reward or motivate people is attractive to companies that don't want to part with cash -- especially startups, which may have weak cash flow as they get off the ground. Whether a company uses grants, options or a mix of the two depends on its particular circumstances and the prevailing philosophy of stock grants vs stock options management.

A startup may prefer options, for example, since they will have value only if the company succeeds. A mature company whose stock price isn't likely to skyrocket may opt for restricted grants. Employees don't typically get to choose whether they get options or grants, but each has its advantages. As long as the company's stock has any value at all, a stock grant has value, too.

An option may become worthless if the share price doesn't rise above the strike price during the period when the employee can exercise the option. But options may have more room to grow, especially in young companies.

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