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myStockOptions.com Update No. 17
On myStockOptions.com we have comprehensive educational content devoted to restricted stock (and restricted stock units). This thorough and well-organized section is one of the main content areas that you can access right from our home page. We continue to expand this section and modify our tools for restricted stock.
myRecords, our online stock grant record keeper, also works for tracking restricted stock grants. Just select "RES" as the type of grant when you enter the data. Below you will find the text of three FAQs on restricted stock, along with highlights of our new related content.
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SPONSORS OF THIS ISSUE:
Restricted Stock: What You Need To Know
Restricted Stock Taxation: What You Need To Know
Restricted Stock: Decisions At Grant (Part 1)
Below are three frequently asked questions (FAQs). They are taken from the 500+ FAQs on myStockOptions.com. All of these are available for your company to license and by individual or bulk Premium Membership.
Is it better to be granted stock options or restricted stock?
This depends on how well your company's stock price does in the years after the grant date. Restricted stock has full value for you at vesting, regardless of whether the stock price drops or stays flat after the grant date. Companies thus give you fewer shares of restricted stock than options.
With options you have more "leverage" and can greatly profit, depending on the growth of the stock price and how long you hold the vested options before exercising. When you run the numbers on your situation (number of options granted, predicted stock appreciation, any dividends), you will see how well your company's stock price needs to perform to make you wealthier with options than with restricted stock. This outcome can depend on the ratio of restricted stock shares you would get instead of options.
Net Worth Strategies, Inc., the developers of the StockOpter (http://www.stockopter.com) software program used by leading financial advisors and wealth management firms, ran the numbers for myStockOptions.com under different conditions. They assumed you are granted 10,000 options or either 3,000, 4,000, or 5,000 restricted stock shares. The dividend is 3% or 0%, starting only after the restricted stock shares vest or also on unvested shares. In each situation, you are comparing the net gains from selling restricted stock at the same time that you would exercise the options and sell the stock (i.e., in a cashless exercise) at the end of option term (assumes a 10-year term).
Break-Even Price Appreciation For Stock Option Gains To Equal Restricted Stock Gains
How is a grant of restricted stock taxed?
The tax treatment differs from that of stock options, where your exercise usually triggers taxes. Instead you pay tax when the restrictions on the stock expire (i.e., when there is no longer any chance that you will not receive the stock -- there is no risk of forfeiture). Your taxable W-2 income is the value of the stock at that time (i.e., the market price) minus any amount paid for the stock.
Alternatively, you can make a so-called "Section 83(b) election" with the IRS within 30 days of the grant. You will then pay taxes on the value of the stock at grant, which will start your capital gains holding period for later resales. If the shares never vest because you leave the company, you cannot recover any taxes that you paid with the 83(b) election.
Example: You receive 4,000 shares of restricted stock that vest at a rate of 25% a year, with a market price at grant of $18. To read the alternative tax treatment for this example as the shares vest and the price climbs, see the relevant FAQ on myStockOptions.com.
Amazon and Microsoft now grant restricted stock units (RSUs). What is the difference between restricted stock and RSUs?
Restricted stock is subject at grant to restrictions on sale and to risk of forfeiture until it is vested by continued employment or by reaching a performance target. The most common time-vested restricted stock normally vests in increments over several years. During the restricted period, dividends or dividend-equivalent rights may be paid, and award-holders may have voting rights.
Restricted stock units (RSUs) have many similarities with some important differences. The stock itself is not issued or outstanding until the actual release of the shares, which delays the ordinary income tax (explained in other FAQs on RSU taxation on myStockOptions.com). Under some RSU plans, such as the grants at Amazon and those that are planned at Microsoft, this delivery of shares occurs at vesting. Other RSU plans have a deferral feature that lets you select a date for share delivery, or the company specifies one (e.g., retirement). Holders of RSUs have no voting rights and, depending on the plan details, may or may not receive dividend equivalents.
Why would your company grant RSUs instead of restricted stock? myStockOptions.com explains this in another FAQ.
Here are more selections from myStockOptions.com's newest award-winning educational content. All of these selections are available to our Premium Members and licensees:
Parts 1 and 2 of How To Avoid The Most Common Stock Option Mistakes by Beth Walker, an article series in Fundamentals: Core Concepts and in Financial Planning: Strategies
How non-competition provisions can appear in restricted stock grants in our Ask The Experts section
Restricted stock basics and taxation articles from USA Today, San Francisco Chronicle, The Online Investor, and more are linked to from our content section on restricted stock.
We will be exhibiting and presenting at the upcoming annual conference of the National Association of Stock Plan Professionals (NASPP). Please visit us if you attend and come to the workshop III session on insider trading education and prevention (Thursday, October 16, 3:30-5:00). Give us your comments on the new version of our Web site; we can tell you about special conference offers on bulk Premium Memberships for your employees and executives.
With so much going on in the stock plan industry and equity compensation, this year's program for the NASPP conference is more valuable than ever. It features more than 50 workshops (plus one general session) that cover everything you need to know about stock plan design, implementation, and administration, from the most fundamental aspects to the latest regulatory developments and newest practices in the US and overseas. For more information on the convention, see www.naspp.com and the full conference agenda at http://www.naspp.com/Conference2003/agenda.asp.
When Microsoft announced its shift from stock options to restricted stock units, numerous publications, from The Wall Street Journal to USA Today, turned to myStockOptions.com for its expertise in explaining the impact of the development and the fundamentals of restricted stock. Many publications recommended myStockOptions.com as the expert source on this topic. The editor of myStockOptions.com even appeared on CNBC. To read selected press clippings, click here.
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