In this blog post, we will compare two of the most commonly used equity compensation schemes and how they differ from each other.
First, we will start with a brief description of these two programs that we will compare in this post:
- Restricted Stock Awards (RSA): These are often referred to as restricted shares or shares with restrictions. This is an immediate share award, where the shares are linked to certain vesting conditions.
- Stock options: A stock option gives the recipient a right, but no obligation, to buy a specific number of shares in the company in the future at a predetermined price.
Now let's examine the various differences between these two structures:
Shareholder 👫
- Restricted Stock Awards (RSA): The recipient owns actual shares and is thus a shareholder from the date of grant.
- Options: The recipient does not own shares and is not a shareholder until the vesting conditions are met and the option holder chooses to exercise the option into shares.cf_200D↩
Voting rights 🗳
- Restricted Stock Awards (RSA): Provides voting rights from grant date (provided the shares held have voting rights)
- Options: No voting rights (until exercise of options)
Yield 💰
- Restricted Stock Awards (RSA): Entitled to dividends (provided the shares held have dividend rights)
- Options: No right to dividend (until exercise of options)
Cost💸
- Restricted Stock Awards (RSA): There is usually a purchase cost for the shares. However, the company can choose to either offer RSAs for free or at a discounted price.
- Options: There is usually no cost of receiving the stock option. There is a cost of exercising the stock option into shares after the vesting conditions have been met. This is called the strike price or exercise price and is set by the company at the time the share option is issued. There are different principles for determining the price. Note that there are specific requirements for option schemes for startups_200D↩
Honey 🧾
The rule of thumb for taxation in Norway is that if the employee receives any benefit as a result of the employment relationship, the benefit is subject to income tax and the company must also pay employer's national insurance contributions (AGA).
- Restricted Stock Awards (RSA):
- If the employee pays market price for the shares, there is no immediate tax liability when the shares are acquired.
- If the employee is distributed the shares or buys them at a discount, an immediate tax claim is triggered. The tax is calculated based on the difference between the market value and the actual price and is taxed as income tax.
- Any subsequent gain/loss on the sale of the shares is taxable in accordance with capital income. If the shares are owned in a holding company, this may be subject to the exemption method.
- Options:
- No tax is triggered at the time of grant.
- Only when the share option is exercised into shares, a tax claim is triggered. The employee must pay income tax which is calculated by: Fair market price at exercise - Total exercise cost - Option purchase cost (the latter is usually zero). Any subsequent gain/loss is taxable as capital income
- If the company, the option recipient and the option qualify under the option scheme introduced on 01.01.2022 (see this blog post), the tax conditions are more favorable: Tax is then not payable until after the shares have been realized. In this case, the company does not have to pay employer's national insurance contributions (AGA).
Risk 📈
- Restricted Stock Awards (RSA): Since the shares are purchased or held, the owner has assumed a financial risk as the share price may decline.
- Options: Options are initially considered risk-free (until the option is exercised). After the exercise date, the recipient is exposed to the exercise cost, which may be greater than the return if the value of the shares falls below this.
Terms and conditions
💡 It is normal for share and option programs to come with certain conditions. The most normal and central in such programs are the vesting conditions the beneficiary must meet in order for the beneficiary to be entitled to the shares. This often works the same for all the ESOP types covered. We will cover more of these in a separate blog post. But below we have highlighted the additional conditions often seen in option programs:
- Exercise price: The price to be paid per share upon exercise of the options
- Expiration period: When the stock option expires
- Exercise clause after termination of employment: The amount of time the employee has to decide whether he/she wishes to exercise the vested stock options after the employment is terminated. There may be various reasons why an employee leaves the company. Different reasons may lead to different exercise intervals after termination.cf_200D↩.
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