Both forms of equity compensation can be wealth-builders as you gain increasing ownership in your company. Employee stock options are the right (not the obligation) to buy shares in your company at a predetermined price, called the exercise price or strike price.
In contrast, with restricted stock it is essentially a gift of company stock and the price at grant date doesn’t matter.
The trend for equity compensation in biotech and high-tech companies is summarized in the table below by Radford, a company which provides expertise in this area.
From the perspective of the employee, stock options can be a better form of equity compensation. The dot-com bust of the early 2000’s was one of the factors that led to the change in equity compensation of publicly traded companies.
In summary, a solid understanding of the differences between employee stock options and restricted stock will help you benefit from your company’s long-term incentive plan as the company matures.
This is a quick 1-page reference tool showing the 11 most common types of equity (share-based compensation).
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