Here are ten common questions I receive from clients about issuing equity (stock or options) to service providers (advisors/directors/officers/employees/consultants):
What’s the difference between options and stock? An option is a contractual right to purchase a certain number of shares of stock (typically common stock) at a pre-agreed price (the exercise or strike price). If someone receives shares of stock, then that person holds a direct ownership interest in the company, along with certain stockholder rights.
Should I grant options or issue shares of stock? It depends on a few considerations, a primary one being the value of a share of stock at the time of grant. If you award shares of common stock, then the value of such shares is taxable to the recipient at the time of grant. In contrast, if you grant stock options, then such options are not taxable to the recipient at the time of grant. There are different types of options (nonstatutory (also known as nonqualified) and incentive), each with different post-grant tax treatment.
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