Why startups should consider issuing restricted stock rather than options.
Early on, before the company’s valuation is too high, startups can give their employees a significant benefit by offering restricted stock rather than options. Restricted stock is stock received 100% on day one that is subject to repurchase by the company. The company’s right to repurchase the stock lapses over time according to a vesting schedule – called reverse vesting. The individual gets to start a capital gains holding period for the stock and the company keeps the incentive of vesting. The company also avoids the expense of a 409A valuation, which is required if the company wants to issue options. Click here to access our downloadable resources.