Can consultants or independent contractors be granted stock options or company stock? How common is this practice?
Private companies sometimes partly use stock options (NQSOs, not ISOs) or stock grants, along with or instead of cash, to compensate consultants and independent contractors (separate from grants that public and private companies make to nonemployee directors). The size and terms of these grants can be different from those made to employees and should be considered in your negotiations (see a related FAQ). If the company goes public or is acquired, these options or shares may become highly valuable. If the IPO or merger never happens, they could be worthless.
Depending on the economy, local market conditions, and attitudes toward stock options, these grants are also made to lawyers, landlords, advertisers, recruiters, and other nonemployee service providers (as well as important customers). In its 2019 Domestic Stock Plan Design Survey, the NASPP found that 20% of the responding companies are willing to make consulting/contracting employees or firms eligible for stock option grants. For restricted stock/RSU grants, the survey found that 16% are willing do so.
Grants of stock options are unlikely to be taxable to you until exercise (see related FAQs on the taxation and reporting for stock options and for restricted stock to consultants and contractors). However, an outright stock grant is compensation income that is taxable on its value at grant unless it first must vest (i.e. it is restricted stock). Restricted stock is taxed on the value at vesting unless you file a timely Section 83(b) election to be taxed on the value at grant.
Alert: When you receive an outright vested stock grant in exchange for your services (legal, marketing, etc.), this is income you must report on your tax return. Not receiving a Form 1099-NEC from the company does not mean you can avoid reporting income. Even though you cannot easily resell the shares because they are not registered with the SEC and your state, the stock is taxable income for an amount equal to its fair market value. You will need a reasonable valuation from an expert or the company.