Most startups reward the people building the company with equity. The two most common forms are restricted stock and stock options. They look similar from a distance — both are typically subject to vesting and both are meant to give the recipient a stake in the upside — but they behave very differently in who becomes an owner, how they are taxed, and, importantly, how much work they are to administer when someone leaves.
This is general information, not legal or tax advice. Equity and tax outcomes turn on specific facts, and the tax summary below is high-level only — anyone weighing a grant should confirm the tax treatment with their own advisor.
Restricted stock
Restricted stock is stock that is actually issued to the recipient at grant, subject to vesting. The recipient becomes a stockholder from day one — on the cap table, with voting, notice, inspection, and dividend rights determined by the share class, governing documents, agreements, and applicable law — but the company keeps the right to buy back the unvested shares at the price specified in the agreement, commonly the original purchase price if the person leaves before vesting.
Benefits
the recipient is a real owner immediately, which aligns incentives; when granted very early the shares cost almost nothing and carry little tax. Holders hold stock from the date of the grant and so start their long term withholding tax period sooner than options (other than early exercise options – see below).
Drawbacks
it puts a new stockholder on your cap table with voting and information rights, and it is the harder of the two to administer on departure (more on that below). If the stock already has real value, an outright grant can also saddle the recipient with an out-of-pocket tax bill on stock they cannot yet sell — which is precisely why companies with valuable stock tend to switch to options.
How it works in practice
the company and the recipient sign a restricted stock purchase agreement (an RSPA), the recipient pays the purchase price for all of the shares up front (usually the fair market value at grant), and the shares are then issued and entered on the cap table subject to the company's repurchase right. The recipient should file an 83(b) election with the IRS no later than 30 days after the shares are actually transferred (see below); the transfer date may differ from the approval, signing, payment, or vesting commencement date. Failure to do so can have materially adverse tax consequences. When the person later leaves, the company administers the departure by exercising its repurchase right over the unvested shares within a certain period (often 6 months): it approves the repurchase, pays the repurchase price, cancels those shares, and updates the stock ledger and cap table — subject to the agreement’s deadlines and mechanics; some agreements provide for automatic repurchase, but the repurchase process still has to be followed to complete the repurchase.
Stock options
A stock option is a right to buy stock in the future at a fixed exercise price generally set at fair market value on the grant date and supported by a reasonable valuation. Usually, for a private company, this takes the form of an independent 409A appraisal. There is a cost to obtain these valuations and you should not issue options without one. The valuations have to be refreshed whenever there is a “material” event that could impact fair market value.
An option holder is not a stockholder — they do not vote, do not receive stockholder consents, and are not on the cap table as an owner — until they exercise the option and pay the exercise price. Options vest over time and generally may only be exercised once vested. Some agreements permit early exercise into unvested stock subject to repurchase, which can start the capital-gains holding period sooner.
There are two flavors. Incentive stock options (ISOs) can only go to employees and, if statutory conditions are met, carry favorable tax treatment (no regular tax at exercise, though AMT can apply). They come with strings — a $100,000 limit on the grant-date value of shares first exercisable as ISOs in a calendar year, a general three-month post-employment exercise requirement for ISO tax treatment (with special rules for disability and death), and special rules for holders of more than 10% of the voting power. Non-qualified stock options (NSOs) can go to any service provider (employees, advisors, consultants, directors) and are taxed as ordinary income on the spread at exercise. Failure to meet ISO requirements can result in NSO treatment.
Benefits
no tax and no cash out of pocket at grant; no new voting stockholder until exercise; and unvested options usually return to the pool when someone leaves.
Drawbacks
the holder eventually has to pay the exercise price (and, for NSOs, tax) to become an owner, and a departing holder can lose vested options if they cannot exercise within the post-termination window. Holders generally must exercise and hold the resulting shares for more than one year for long-term capital-gains treatment on later appreciation. Favorable ISO treatment also generally requires waiting more than two years from the option grant date before selling.
How it works in practice
options are granted under a board-adopted equity incentive plan, which reserves a pool of shares for awards. Before options are granted, the board sets the exercise price at the fair market value of the common stock, which a private company commonly establishes through an independent 409A valuation (typically refreshed annually or on a material event that might impact fair market value of the Company’s stock). The recipient signs a grant notice and option agreement but pays nothing and receives no shares at grant; they become a stockholder only if and when they exercise — pay the exercise price — after the options have vested, unless the agreement permits early exercise.
Side-by-side
| Feature | Restricted stock | Stock options |
|---|---|---|
What the recipient gets | Actual shares at grant — a stockholder from day one. | A right to buy shares later at a fixed price (the exercise/strike price). Not a stockholder until they exercise. |
Cap table, voting, information | On the cap table immediately; votes, signs or receives stockholder consents and notices, and receives dividends in the same way as common stock holders. Note: This doesn’t mean you NEED their vote, just that they will get a copy of any stockholder consent voting materials either before or after a vote is passed. Applicable law and the company’s documents determine who votes and who receives notice of action by written consent. | Not on the cap table as a stockholder, and no vote, consent, or information rights, until the option is exercised. |
Up-front cost | Little or nothing when granted very early (par value or a low purchase price). If granted later when there is real value, there is a real purchase price. See example. | Nothing at grant; the holder must pay the exercise price to acquire the shares. |
Tax at grant | Without an 83(b) election, value over the price paid is generally ordinary income as the shares vest. A timely election instead measures that spread at transfer, when it is usually low. Typically, you should require the holder to pay cash equal to the value of the grant. With a timely 83(b) election, this generally eliminates compensation income at transfer and vesting and is simpler to administer for the holder and the company. Tax can still arise on a later sale. | Generally no tax at grant for a standard private-company option. The strike price is set at fair market value (which typically requires a 409A valuation). |
Tax later | With a timely 83(b) election, later appreciation is generally capital gain on sale; long-term treatment requires the applicable holding period. Without the election, ordinary income generally arises as the shares vest. This can cause significant tax liabilities if the company’s stock increases in value. | At exercise: an NSO is ordinary income on the spread; an ISO has no regular tax but can trigger AMT. After exercise, later appreciation generally produces capital gain on sale; ISO holding-period failures can produce ordinary income. Long-term treatment requires the applicable holding period. |
How vesting works | 'Reverse vesting' — the company may repurchase unvested shares if service ends. | The option vests, then becomes exercisable; some agreements allow early exercise of unvested options into restricted stock. |
When the holder leaves | Company must follow the agreement’s repurchase mechanics and deadlines. Vested shares stay with the person, usually subject to a right of first refusal and repurchase rights. | Unvested options generally terminate under the award terms; whether the shares return to the pool depends on the plan. Vested options must be exercised within the post-termination window (commonly 90 days, but this can be extended (e.g. for executive hires)) or they expire. Extending the window can affect ISO treatment and requires tax review. |
Typical best fit | Founders and very early grants, when fair market value is near zero. | Non-founder hires, advisors, and consultants once the company has meaningful value and a 409A. |
What a grant actually costs: a worked example
The up-front economics are easiest to see with numbers. Take a 100,000-share grant.
Restricted stock
The recipient buys the shares at grant. At a $0.0001 fair market value, 100,000 shares cost $10 — trivial. At a $1.00 fair market value, the same 100,000 shares cost $100,000 out of pocket to purchase, and to the extent the recipient pays less than fair value the shortfall is taxable income. That jump is exactly why restricted stock stops being practical once the stock has real value.
Options
Nothing is paid at grant. At a $0.0001 strike, exercising all 100,000 vested options later costs $10; at a $1.00 strike, exercising costs $100,000 — but only if and when the holder chooses to exercise, and only for the shares they want. The holder is never forced to spend anything to hold the award, but must exercise before the applicable deadline to keep the option. The exercise price is not the entire cost: NSO exercise can generate ordinary income on the spread, and ISO exercise can trigger AMT even without sale proceeds.
What happens when someone leaves
This is where the two diverge significantly, and where restricted stock creates real administrative work.
Restricted stock
Vesting stops at departure. Under a typical RSPA, unvested shares do not disappear on their own — the company has to follow its repurchase provisions: approve the repurchase, send the notice within the window set by the grant, pay the repurchase price, and update the cap table and stock ledger. Some agreements provide for automatic repurchase, but payment, notices and recordkeeping still need attention. If the company misses a required step, the departed person may simply keep the shares. Vested shares stay with the person as an outside stockholder — usually subject to a right of first refusal and any repurchase rights — meaning a former service provider can remain on your cap table with voting and information rights.
Stock options
Vesting also stops at departure, but the mechanics are lighter. Unvested options generally terminate under the award terms; whether the shares return to the pool depends on the plan. Vested options must be exercised within the post-termination exercise period — commonly 90 days (driven by the ISO 3-month rule, which most companies apply to all grants) — or they expire. A longer contractual window may preserve the ability to exercise while losing ISO treatment. Unless and until the holder exercises, they never become a stockholder, so there is nothing to repurchase and no one new to keep on the cap table.
Where each fits: founders, the plan, and when to switch
Restricted stock is almost always how founders take their equity, and it is typically issued outside any equity plan — directly at or near incorporation, before a plan exists. Once the company adopts an equity incentive plan, later grants are made from the plan's reserved pool. Early plan grants can still be restricted stock while the fair market value is very low, but as the company matures it generally moves to options for non-founder hires.
The reason to use restricted stock early is cost and simplicity: when the fair market value is a fraction of a cent, a recipient can buy all of their shares outright for a few dollars, file an 83(b), and start the capital-gains clock — with no strike price, no 409A valuation, and no exercise decision to make later. Once the valuation rises, that same outright purchase becomes expensive, or a below-market purchase can create a tax bill on stock the person cannot yet sell, so the calculus flips. At that point options are the better tool: the recipient pays nothing up front, the strike is fixed at the current 409A value, and they decide later whether to exercise. As a rough rule, restricted stock makes sense while the price per share is nominal; once buying the shares would be a meaningful out-of-pocket cost, switch to options.
Section 83(b) elections — and why they matter
An 83(b) election tells the IRS to measure compensation income when restricted stock is transferred — on the excess, if any, of its value over the amount paid — rather than taxing each tranche as it vests at whatever the shares are worth then. For early-stage restricted stock that often means little or no tax at transfer and starts the capital-gains holding period then. Later appreciation is generally capital gain on sale, with long-term treatment only after the required holding period.
Unforgiving on timing
The election is unforgiving on timing: it must be filed with the IRS no later than 30 days after the shares are actually transferred.. There are no extensions. Miss it by a day, and the tax consequences can be devastating. Missing the deadline can leave the recipient owing ordinary income tax as the shares vest, potentially a very large bill. Eligible filers can submit Form 15620 through the IRS’s online service and retain the submitted form and success confirmation. For paper filing, keep a signed copy and evidence of timely mailing and delivery by USPS certified mail with a postmarked mailing receipt and return receipt. If using a courier, choose an IRS-designated private delivery service and its qualifying service level, and use the appropriate street address; tracking alone is not enough. Give the company a copy of the election. The recipient is responsible for the election; if the company or a filing service assists, confirm who will submit it and retain proof of timely filing.
Common questions
How much will the shares cost me?
For restricted stock, the purchase price is set by the agreement, typically fair market value at transfer times the number of shares (see the worked example above). For options, nothing is due at grant; you pay the strike price only if you choose to exercise. For early stage companies, fair market value is usually established by the Board, without a need for a formal valuation (unlike options, which usually require a 409A valuation).
When do I file the 83(b), and what date do I use?
No later than 30 days after the shares are actually transferred. Use that actual transfer date for the “date the property was transferred” on the form. The date is a factual question, and depends on the terms of the board approval and stock purchase agreement.
Do options need an 83(b) election?
No — a standard option needs no filing at grant. An 83(b) is for restricted stock (and for options you early-exercise into restricted stock).
What if I miss the 83(b) deadline?
There is generally no routine late-election cure or discretionary extension. You can owe ordinary income tax as the shares vest — often a large amount and without any liquidity to pay taxes. Treat the 30-day deadline as absolute. If you do miss it, speak to your lawyer about the ramifications and your options.
How do I prove I filed?
For an online filing, retain the submitted form and IRS success confirmation. For paper filing, keep the signed election, a postmarked certified-mail receipt or qualifying IRS-designated delivery-service evidence, and delivery confirmation. Use the correct IRS address and give the company a copy. A tracking number or a copy bearing only your own date is not sufficient proof of timely filing.
Why do options need a 409A?
A standard option’s strike price should be at least the common stock’s fair market value at grant to avoid discounted-option issues under Section 409A. A reasonable valuation is required. This is usually satisfied by an independent 409A appraisal. Update a valuation before relying on it if it is more than 12 months old or material new information affects the value.
Should we grant a fixed number of shares or a percentage to employees?
Grant a fixed number of shares in any offer letter. Percentages drift as the cap table changes and invite disputes; the offer letter and grant documents should state a share number and never include a %.
Does unvested equity go back into the pool automatically?
Not always. Unvested options usually return to the plan pool, but forfeited or repurchased restricted stock does not automatically replenish the pool unless the plan says so — confirm before assuming shares are available to re-grant.
Does my spouse need to sign?
In community-property states, restricted stock purchase agreements typically require a spousal consent so the spouse's community interest is bound by the same vesting and transfer restrictions.
Parallax practical take
As a general matter, restricted stock fits founders and very early grants, when fair market value is near zero: the shares are cheap to buy, the 83(b) election is extra administration but is easy to manage with few stockholders, and full ownership from day one matches how founders think. Once the company has meaningful value, options are usually the cleaner tool for non-founder hires, advisors, and consultants — ISOs or NSOs for employees, NSOs for advisors and consultants. Options generally defer the cash and tax decision until exercise, though exercise can still trigger tax on stock the holder cannot sell. They keep your cap table and stockholder consents limited to actual owners and — the point founders most often overlook — are far simpler to unwind when someone leaves, because unvested options generally terminate without requiring a share repurchase, with recycling governed by the plan. This is a business decision as much as a legal one; we are happy to talk it through for any particular grant.
Email Isaac · isaac@parallaxlaw.ai
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