What is restricted stock?

Restricted stock (RSA) is actual shares issued upfront, subject to vesting and company repurchase rights. The recipient owns the shares immediately but can lose unvested shares if they leave.

What are stock options?

Stock options give you the right to buy shares at a fixed price (exercise price) in the future. You don't own shares until you exercise. Options typically come as ISOs (for employees) or NSOs.

What is the main difference between restricted stock and options?

With restricted stock, you own shares from day one (subject to vesting). With options, you have the right to buy shares later. This affects when you pay, when you're taxed, and your risk if you leave.

When should founders use restricted stock vs options?

Founders typically get restricted stock at incorporation when the price is near zero. Employees joining later typically get options because the company value has increased, making restricted stock expensive and tax-inefficient.

What is an 83(b) election and when is it needed?

An 83(b) election lets you pay tax on restricted stock at grant rather than as it vests. It's crucial for founders getting cheap shares but risky for employees if the stock is already valuable.

Why do most startups give employees options instead of restricted stock?

By the time employees join, shares are typically worth enough that buying restricted stock would be expensive and create immediate tax liability. Options let employees delay payment and taxes until exercise.

Restricted Stock vs Options (for Employees)

Why Aegis Defaults to Options

For US-based B2B founders (Angel → Series A): understanding the key differences between restricted stock and options—and why we recommend options for employees.

TL;DR (for busy founders)

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Aegis uses restricted stock as equity incentive compensation only for founders by default.
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For employees, we recommend options as the standard and refer you to a human lawyer for custom work if you want restricted stock for non-founders.
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The core difference: restricted stock makes someone a stockholder immediately; options are a right to buy later, so no stockholder rights until exercise.

What's the same?

Both restricted stock and options need to be issued at fair market value and the board of the Company needs to verify that fair market value and approve the issuance. In both cases, the recipient gets a certain kind of "right" to more shares over more time through what's called "vesting."

What's different?

1) Fair market value (tax code requirements and penalties)

With options, the Company and the optionee may be subject to certain tax penalties if the fair market value is not determined by an independent firm in accordance with certain tax code requirements and the IRS later determines that the exercise price of the option is lower than the then-current fair market value.

For restricted stock, there are less requirements and tax penalties related to fair market value and a reasonable fair market value determination may be sufficient and subject to less tax penalties if challenged by the IRS.

2) Ownership + leverage + governance (who becomes a stockholder, and when)

Restricted stock is stock that is not freely tradeable pursuant to securities laws often under terms that allow the company to repurchase it. "Vesting" restricted stock means technically removing the stock from the company's right of repurchase, such that the company can no longer buy it back at the same price and the stockholder owns it forever. When restricted stock is granted, the recipient immediately owns all of that stock in the company. The company is required to have the board approve the grant.

Options are right to purchase stock at a future date at a price set according to today's fair market value. So, the holder of an option doesn't yet own stock until they "exercise" the option. This means they don't have stockholder rights until that time.

Example (restricted stock)

For example, Ruth and Sandra own 2,500 shares of ScotusCorp each, and have run it for 4 years. Elena joins ScotusCorp and they issue her 2,500 shares of restricted stock vesting over the next 4 years with a one year "cliff". Elena must pay for all 2,500 shares right away, at which time she immediately owns a third of the company and has equal power to Ruth and Sandra to vote for the board, get information about the company, etc. If the company pays any stock dividends, Elena gets just as much as Ruth and Sandra even though she just arrived. If Elena quits after 2 years, the company can buy back 1,250 shares by affirmatively sending Elena the money. If they don't, Elena still owns all those shares. Elena pays only capital gains taxes on the shares after an exit ONLY IF she files an 83(b) election.

Dispute leverage: If Elena ends up in a dispute with the company, she commonly denies having stopped vesting or demands large sums to buy back vested shares. She has additional leverage as a stockholder in any dispute, because the company will want the stock back too. These demands may come immediately during termination or at the time of an exit or major investment, when a buyout of dead equity becomes desirable.

Same example (but with options instead of stock)

If Elena had options rather than stock in the example above on the same vesting schedule, she would pay nothing right away. If she left after 11 months and 28 days, she could never own any stock. If she left after 2 years, she would have to pay the company for the 1,250 shares if she wanted to own that stock. Many people in Elena's position decline to do so.

Elena could start buying some stock after a year, but not before. Only at the time she bought stock would she have rights to do stockholder things like vote for the board.

Why Story uses options for employees

The reason Story built Aegis automations to use options for incentive equity compensation is that we've found, over the long run, options cause minimal pain and liability for the company in the event as early team member doesn't work out (which is common). We take the position that cleaner cap tables and voting rights early on are usually better for startups, but you can always ask for help from a lawyer to examine what's best for you - it might be different.

For Aegis subscribers, you can choose to issue both option and restricted stock grants under an equity incentive plan. When you add an equity grant while hiring employees and contractors, we'll use the option default.

What options usually require (process + filings)

The company is required to have a board and stockholder approved option plan and make a filing in some states to register the issuance of shares under the plan, but one filing can cover all shares under the plan.

Founder misconceptions (and the straight answer)

"Restricted stock is better for employee taxes"

This isn't true. For US based employees, tax treatment is roughly equal IF the recipient files their 83(b) elections; if they forget to do that, the tax treatment is worse. Plus, the employee has to cut some checks right away and the company has to track it.

What may change about taxes is that if the price is much higher before exercise, the employee pays more taxes than they would have at the time of grant - but they also never had the risk of paying taxes for shares that might be worthless.

"I have to get a 409A valuation for the options, and I'd rather not spend the money."

It is true that a 409A valuation costs a material amount of money. It may be worth it for you to avoid getting one by issuing restricted stock, for example if you expect to hire one person this year and no more, and to have that person be very close to the management of the company.

If you are hiring multiple people and want to give them equity incentive compensation, though, having each of those people be stockholders may complicate corporate governance and trigger formal requirements like annual stockholder meetings and reporting requirements that cost more than a 409A valuation. Overcrowded cap tables have the potential to discourage investors. So skipping the 409A valuation may cost you more than it saves you.

"Restricted stock is better motivation"

This isn't necessarily true. Options and restricted stock end up having roughly the same value if the company is acquired, but the optionee now has income to cover taxes.

On top of the up front purchase price, restricted stock may give someone minor in the company's story outsized power and feelings of importance, which in some cases appears to hinder productivity or be associated with lower-productivity team members.

FAQ

Q: Can I issue restricted stock to an employee anyway?

A: Aegis uses restricted stock as equity incentive compensation only for founders by default; for employees, we recommend options as the standard and refer you to a human lawyer to do custom work to any issuance of restricted stock to non-founders.

Q: What's the biggest functional difference I should remember?

A: When restricted stock is granted, the recipient immediately owns all of that stock in the company. Options are a right to purchase stock at a future date, and the holder of an option doesn't yet own stock until they "exercise" the option.

Q: Why do you care so much about not making everyone a stockholder?

A: We take the position that cleaner cap tables and voting rights early on are usually better for startups. Having each of those people be stockholders may complicate corporate governance. Overcrowded cap tables have the potential to discourage investors.

Equity Decisions Can Be Tricky

We built Aegis to apply knowledge like this so busy founders don't have to.

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