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The Key Difference between Restricted Shares and Shares Option…!!

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The Key Difference between Restricted Shares and Shares Option

Companies evolve with time and so their revenue options. Most of the companies which are at the initial stage, compensate their employees with various options. They go beyond traditional means such as salaries and bonuses to retain their employees. They provide incentives in the form of stock options and restricted shares options. The stock options are mainly given to high performing employees as a part of remuneration. They can use these shares and can make a profit later as per the terms and conditions of the stock options.  

Let’s try to understand it with an example. Suppose a company hires a vice president of sales and offers him 10,000 stock options as part of the deal after the company reaches a certain sales figure. After a certain period, he reaches a particular sales figure. As per promise, he was given the promised stocks but with one condition, he would be able to exercise his rights after 3 years. Now, when the CEO receives the stock, the stock price is Rs 3 per share, but after three years let’s say the price of the stock increases to Rs 12 per share. Hence, a profit of Rs 9. That’s a huge profit. On the other hand, Restricted stock units are offered to those employees in the organization which has performed exceptionally well in the organization. The way of their construction is quite different. RSUs are paid as per a vesting schedule and don’t offer all the shares together. Let’s look at the difference between share options and restricted shared. 

  1. Shareholder’s Right: In the case of stock options, the shareholders get the full right. But in the case of Restricted share unit, the share units are given with certain restrictions.  
  2. Voting Right: In the case of stock options, the voting right is given. But in the case of the Restricted share units, rights are not given.  
  3. Payment of Dividend: In stock options, the dividend payment is enabled, while in the case of RSU, there is no dividend paid.  
  4. Settlement after Investing: In the case of stock options, after the vesting period is over then the stock options become stock and it depends on the employees, how he wants to exercise the options. Whereas in the case of RSU, terms need to be followed, and then shares offered are settled. Employes can defer the settlement for receiving tax benefits but to a certain extent.  
  5. Mode of payment settlement: In stock option, the mode of payment is only through stocks. Whereas, in the case of RSU, it is through either through stocks or cash.  
  6. Tax treatment: In the case of the stock options, tax is being paid at the time of sales at long term capital gain tax. Whereas, in the case of RSU taxes are based upon investing. If it’s holding period is more than 12 months, then capital gains treatment can be possible.    

Either of them is offered so that the companies can retain extraordinary talent. Despite having differences in each of them, they have own peculiar properties and advantages for the employed. With the rise of the startup culture in the world, both terminologies are getting more importance. As much of the company lacks the liquidity to fulfill their employee’s demand. So, in other words, it acts as the best means to promote a good corporate culture, where employees not just work and get paid but also become part of the company’s journey. It boosts the morale of the employees and also provides an emotional reason to connect with the company’s core beliefs.  

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*Disclaimer: investment in securities market are subject to market risks, read all the related documents carefully before investing

 

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