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What's Better - Stock Options or Restricted Stock? Ep 52

When you’re offered an Equity Compensation package, how do you decide which options are better for your situation? It’s not easy to wade through the differences, so I recorded this episode to help you understand them. In this episode you’ll learn the positives and negatives of both stock options and restricted stock. You might also learn how you can select both options — if your employer allows you to choose both. Listen to get the details.

You will want to hear this episode if you are interested in...

  • The current trends in Equity Compensation [1:26]
  • Why the current changes are not all that bad [4:46]
  • The positives and negatives, broken down [5:08]
  • So which is better? [11:17]
  • FLASHBACK: My time in the “speech trailer” [12:40]

Employers are not all the same

I’m hopeful that in the future, all employers will handle Equity Compensation the same. But currently, that’s not the case. Not all employers give the benefit of choosing how you want to receive your Equity Compensation. But when they do, it’s a great option to have.

Some will allow you an either/or sort of choice. Either you get to choose a non-qualified stock option, or you get to choose a restricted stock option — but not both.

The best programs allow you to do a combination if you like, where you can receive part of your Equity Compensation as a restricted stock option and another percentage as restricted stock options.

Trends relating to stock options and restricted stock awards

The past few years, things have changed. A dozen years ago, nearly ¾ of Equity Compensation plans were awarded as stock options. This makes sense because there’s no risk issuing or receiving stock options. If they don’t increase in value over the exercise period, you haven’t lost anything. However, this gap is getting narrower.

Roughly 5 years ago, the trend flipped. The last data — from 2017 — shows restricted stock comprising 60% of Equity Compensation awards and there’s one main reason behind this shift. This happened because a hard lesson was learned: stock options only have value if the value of the stocks goes up. That’s the down-side.

The pros and cons: Stock options VS Restricted Stock 

Pros of stock options:

  • No risk — you have the option to exercise them, but don’t have to
  • There is no performance connected to whether they vest

Negatives of stock options:

  • No intrinsic value in them
  • No dividends (because you don’t own or control them until you 

A quick warning when it comes to STOCK OPTIONS

11% of in-the-money options are allowed to expire, unexercised every year. Don’t let yourself fall into this statistic due to inattention or laziness. It’s not smart to leave money on the table when it could be yours.

Pros of restricted stock:

  • There is intrinsic value when you receive it and it’s not likely to go to zero
  • You can receive dividends and voting rights
  • Has the old 83b election to go along with it, which means you have 30 days from receipt to decide if you want to accelerate the recognition of taxes on the stock

Cons of restricted stock:

  • The tax rate is at the ordinary income rate
  • Although you control restricted stock, you don’t own it until it vests

This week’s FLASHBACK: 

I spent my early years in Catholic schools and due to it being a private institution, it wasn’t possible for State sponsored programs to be implemented in the private school. So… for speech and diction issues, the State (Ohio) sent around a trailer… yes, a literal trailer that parked outside the school and allowed students to come out for speech lessons.

Since my Dad grew up in Maine, I inherited a pretty thick upper New England accent. For that reason, I spent a good amount of time in the speech trailer.

I’m Dan Johnson, CFP®, founder of Forward Thinking Wealth Management. I run a flat-fee financial planning and investment management firm located in beautiful Akron, OH. Although I am in Akron, OH, I work with clients regardless of location. I cater to owners of equity compensation positions who are looking to organize their financial lives, keep more of what they make, and do the things they want in retirement and even now.