Restricted Stock Award vs. Incentive Stock Option

[vhalros]

My employer (a startup) has given me the choice between receiving either restricted stock awards or incentive stock options. The vesting schedule and the purchase price are the same in either case. I'm not sure I see a huge difference either way. The shares are wroth  very little right now ($ .01/share), and so it seems sort of pointless to acquire and sell the stock immediately (if I even can figure out how to, since it is not publicly traded). It seems like, either way, if I acquire the RSA or the ISO, I will hold them a while and the tax implications will be nearly the same on sale.

What, if anything, am I missing?

[protostache]

I'm definitely not an expert in taxation on these things. I would sit down with a CPA to talk through your options. One thing to look into is an 83b election (has to be done within 30 days of the grant) which lets you pay all of the taxes up front instead of a little each year of the vesting schedule. If the stock is really worth $0.01 then it sounds like it makes sense.

[Indexer]

This is a case where I think a CPA makes sense. There are some cases where the potential tax savings outweigh the cost of the CPA, and this could be one.

I also believe there is a strategy where you can put these in a Roth which comes in handy when it appreciates. Again, talk to a CPA.

[seattlecyclone]

The tax treatment can be quite different between the two choices.

ISOs: The price is fixed based on the grant date. When you exercise, the difference between the value on that date and the strike price is not immediately taxable (per the regular tax rules), but is taxable under the AMT. Exercise well in advance of a liquidity event and you probably won't see much in the way of immediate income even under the AMT. Then when you are able to eventually sell, you pay capital gains taxes on the income. This is another reason why exercising in advance of the IPO can be useful: hold the shares for a year after the exercise and you get taxed at long-term capital gains rates instead of regular income rates. Of course, exercising early has plenty of risks as well: there's no way to know when or if you'll be able to sell your shares. Don't sink too much of your money into them.

Stock grants, on the other hand, are generally taxed as regular income at their full market value when they vest. The 83(b) election protostache mentioned is worth considering when the shares have such a low value right now. You pay tax right away on the current value, which turns out great if you stick around for the shares to vest and they become worth something someday. If you switch jobs or the company goes under, I don't think you get a refund on the tax you pre-paid.

[sokoloff]

If you switch jobs or the company goes under, I don't think you get a refund on the tax you pre-paid.

You don't, but IMO, it can still make sense for a very early stage company (where the 83b election is not expensive) that could be a moonshot.

By the time a company has closed a series B, it's probably not going to be cheap enough to make an 83b election to make it a no-brainer. I joined my current company as we were about to close a series E round and didn't consider the election for a second.

[SugarMountain]

Are they true ISOs or are they NQSO (Non-qualified Stock Options).  ISOs are nicer in some ways and have more tax avoidance mechanisms, although to be honest I think it's been almost 20 years since I had actual ISOs.

Do you get the same number of shares whether you choose the options or the RSUs?

I'm not sure how it works for a non-public company, but for a public company, RSUs get converted to actual stock on the vesting dates and you owe taxes on them for that year.  Whereas with the options, you don't owe any tax until you exercise them and then generally the difference in price and strike price is is treated as income whether you exercise and sell or just exercise.

What happens to your options if you leave the company or they expire before the company goes public?