3 ms·

Quick question: Why should a company give share options to employees, and not plain old shares? Is this just because it's better tax-wise for the company?

doki_pen 13y ago
If they gave you shares you'd have to pay income taxes on those shares for something that may never make you any money. Most people wouldn't choose to do that.
- joosters 13y ago
  But (assuming a startup or young company), the shares would have little value and so the tax would be small. Plus, if the shares became worthless you could offset that loss against future income (I guess?) View it like the company giving you a cash bonus - not many people would turn down the bonus, even if it meant there would be tax due on it. If you think the shares have future value, then paying the tax on their current price would seem a good deal. If you don't think the shares are value, then share options would be even worse. Admittedly you've still got to pay the tax up-front...
  - Peaker 13y ago
    If the shares are given after an investment of $1 million, then 0.5% of the company is $5000, just by a conservative evaluation that takes only the investment value into account. If you think the shares have a guaranteed future value, then the shares are better than the options. If you think the shares have a guaranteed lack of future value, then the options are free, whereas the shares will cost you. If you think there is substantial risk that the shares will have no value, then getting options rather than shares mitigates that risk. You only pay for that mitigation if you actually exercise the options, in which case the cost comes off of a big payoff, rather than an upfront payment out of pocket.
  - balls187 13y ago
    The difference is you can actually use your cash bonus to pay out the taxes on that bonus. For restricted-stock, you cannot sell the stock, and thus have to pay taxes out of pocket. If the company is public, you can sell some shares to cover this cost (typical for stock bonus awards), but as many tech companies aren't public, their stock is restricted such that you cannot sell it to other individuals.
rpedela 13y ago
If you give shares, employees have to pay taxes on those shares. In the case of an 83b, employees pay all tax upfront which is good because that is supposedly the lowest value the shares will be worth so the taxes will be low too. However it is possible that the tax burden is still high depending on the value of the shares and number of shares. Options are generally better for employees because they are not forced into paying more tax. The exception is in the very early stage where shares are basically worth nothing so the tax is basically zero. Also remember that employees cannot sell shares at will if it is a private company, they need board approval. For the company, there isn't much difference either way as far as I am aware.
bobbles 13y ago
I guess it reduces the risk of offload some of the ownership of the company to someone that could leave the next day.

doki_pen 13y ago

If they gave you shares you'd have to pay income taxes on those shares for something that may never make you any money. Most people wouldn't choose to do that.

joosters 13y ago
But (assuming a startup or young company), the shares would have little value and so the tax would be small. Plus, if the shares became worthless you could offset that loss against future income (I guess?) View it like the company giving you a cash bonus - not many people would turn down the bonus, even if it meant there would be tax due on it. If you think the shares have future value, then paying the tax on their current price would seem a good deal. If you don't think the shares are value, then share options would be even worse. Admittedly you've still got to pay the tax up-front...
- Peaker 13y ago
  If the shares are given after an investment of $1 million, then 0.5% of the company is $5000, just by a conservative evaluation that takes only the investment value into account. If you think the shares have a guaranteed future value, then the shares are better than the options. If you think the shares have a guaranteed lack of future value, then the options are free, whereas the shares will cost you. If you think there is substantial risk that the shares will have no value, then getting options rather than shares mitigates that risk. You only pay for that mitigation if you actually exercise the options, in which case the cost comes off of a big payoff, rather than an upfront payment out of pocket.
- balls187 13y ago
  The difference is you can actually use your cash bonus to pay out the taxes on that bonus. For restricted-stock, you cannot sell the stock, and thus have to pay taxes out of pocket. If the company is public, you can sell some shares to cover this cost (typical for stock bonus awards), but as many tech companies aren't public, their stock is restricted such that you cannot sell it to other individuals.

rpedela 13y ago

If you give shares, employees have to pay taxes on those shares. In the case of an 83b, employees pay all tax upfront which is good because that is supposedly the lowest value the shares will be worth so the taxes will be low too. However it is possible that the tax burden is still high depending on the value of the shares and number of shares. Options are generally better for employees because they are not forced into paying more tax. The exception is in the very early stage where shares are basically worth nothing so the tax is basically zero. Also remember that employees cannot sell shares at will if it is a private company, they need board approval. For the company, there isn't much difference either way as far as I am aware.

bobbles 13y ago

I guess it reduces the risk of offload some of the ownership of the company to someone that could leave the next day.