Options. Stock. Equity. Vesting. Sweat Equity. These are just a few of the concepts that are part of a startup’s toolbox for building a team and which generally fit within the broader category called “equity compensation.” It is essential for a company’s cap table and the rights and restrictions associated with the securities listed on the cap table to be properly documented, compliant with securities and tax laws (including certain time sensitive filings), and granted pursuant to proper board approvals. While some startups may be tempted to take a DIY approach, the costs incurred with correcting any mistakes (both in terms of re-documentation and addressing investor diligence questions/concerns) often greatly exceeds the cost of having a lawyer do it correctly the first time. Here are ten common questions I receive from clients about issuing equity compensation to service providers: 

What’s the difference between options and stock? 

An option is a contractual right to purchase a certain number of shares of stock (typically common stock) at a pre-agreed price (the exercise or strike price). If someone receives shares of stock, then that person holds a direct ownership interest in the company, along with certain stockholder rights.

Should I grant stock options or shares of stock? 

It depends on a few considerations, a primary one being the value of a share of stock at the time of grant. If you award shares of common stock, then the value of such shares is taxable to the recipient at the time of grant. In contrast, if you grant stock options, then such options are not taxable to the recipient at the time of grant. There are different types of options (nonstatutory (also known as nonqualified) and incentive), each with different post-grant tax treatment. For a more in-depth article on this particular question, please check out this article.