Stock Grants vs. Stock Options

Stock options and stock grants are both ways in which companies can provide share ownership of a company to employees. Although both of them involve employees having a share in the company, the mechanism by which this is done is different for both. In stock grants, the company buys said shares from the stock market and then distributes them to the employees according to an agreed system.

In stock options the company gives the employees a right to buy shares of the company directly. They usually do this at a particular price, which is normally lower than the price of the stocks in the stock market. There’s usually a vesting period during which you cannot sell the shares. Most stock options are short-term, and in many cases the value of the stock options decreases as the expiration date approaches.

There are different categories of stock options. The main ones are the call options and the put options. In the call options, the employee is given a right to buy the company’s stock in the future, but he or she isn’t obligated to do so. In contrast, the put options give the employees the right to sell the stock in future, but not the obligation.

Reasons for issuing stock options and grants
Stock grants and stock options are one way in which a company can make employees part of the company. What happens is a company gives employees a chance to own a part of the company. This is one way in which many companies can ensure that they get the most out of their employees, whilst giving them the benefits of an extra income from owning part of the company. If you own a part of a company through stock grants or stock options, you are more likely to work harder to ensure the success of the company, so that you can get the most out of it. In a sense, these are the best ways to instill employee loyalty. The profits made by the company are shared by all employees who own such shares, so they would struggle to make sure that maximum profits are made

Similarities
Both are ways of sharing profits with employees. The only way that the employees can get the most out of the investment is by ensuring that the company on the whole does well. Between these two counterparts, what strikes as the first impression is definitely their differences so let us carry on the discussion there.

Differences
There are several differences between stock options and stock grants. One of these is the valuation. In stock grants, finding the value of the shares is more definite. There is a specific protocol that has to be followed when evaluating stock grants, which makes it easier to run in terms of accounting and execution. Also, the fact that stock grants can be easily valued means that you can easily discover whether the company is being fraudulent or unfair, since the process follows a specific pattern.

In stock options, however, the issue is a bit different. There is no definite method of valuing the stock, and in some cases, it’s arbitrary. This means that different institutions will follow different protocols when it comes to valuing the stock. This may bring about potential problems: stock options can be overvalued, and it would be difficult to prove that the company had ulterior motives. This also means that stock options provide more leeway for fraud by companies that aren’t very transparent. However, this is rare, and an employee can invest in stock options with relative security and peace of mind.

The other difference between the two is tax deductions. Currently, the money spent on stock grants is tax deductible as compensation to employees. However, the expenses incurred due to processing of stock options do not attract any tax deductions.

Apart from that, stock options have a vesting period whilst the grants do not. A vesting period is basically a period you must wait between being given the right to buy the shares, and the actual buying of the shares. Stock grants, however, can be bought immediately you get the chance to do so. The other notable difference between stock grants and options is the fact that stock grants usually don’t lose value with time, but stock options may decrease in value as time goes by. Also, a company doesn’t need to be a public company before it issues stock grants. Generally, a company has to be a public company before it can issue stock options.

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