My job has a targeted stock option grant of 250 options per quarter, vesting at 25 percent annually. What is the best way to take these grants –all options, 100 percent Restricted Shares or 50 percent Option/50 percent RSU)? – Gary


This is a complex question and one that should be answered in consultation with your tax advisor. We’ll cover the basics in a moment, but we would like to highlight one important consideration: specific company risk. As you accumulate equity in your company (via options or restricted stock), ensure that you don’t become overweighted in your company’s stock. You’re income is already dependent on the company, do you really want the majority of your investment portfolio tied to the financial well-being of the company also? History is filled with horror stories of employees who, financially speaking, went down with the ship – Enron, for example. So, regardless of how you choose to participate, make sure you keep close tabs of where you stand – a decent rule of thumb is no more than 10% of your portfolio should be invested in any particular company.

While both options and restricted stock offer a means to participate in your company’s success, there are significant differences. With an option, you receive the right to buy your company’s stock at a set price sometime in the future. On the other hand, with restricted stock you get the stock once you meet the vesting requirement.

Thus, with restricted stock, as long as the company stock has value, you’ll have something of value when you vest.

With options, if the value of the stock does not exceed the price at which you can purchase the stock there is no value. Options require you to purchase the stock (even if it’s a cashless exercise), whereas with restricted stock there is no required outlay.

On the tax front, normally with restricted stock you are taxed on the value of the shares when they vest, so you don’t have a lot of control. With stock options, you are typically taxed when you exercise the options. Whew! Although this is a high level overview of these two options, hopefully you’ll be armed with more information when you talk with your tax advisor. Good luck.