Answers|Dictionary

Can I give an advisor restricted stock instead of options?

EquityAdvisorsTax

Yes, and at the very start of a company it is often the better instrument. When the common stock's fair market value is close to nothing, an advisor can buy vesting shares outright for a nominal price, file an 83(b) election within thirty days, and hold stock rather than an option: no exercise to fund later, and the capital gains holding period starts on day one. Once the stock has a real 409A value, the purchase price becomes a real check and options take over.

How it works

The board approves the award under the equity incentive plan: recipient, number of shares, purchase price at fair market value, vesting schedule. The advisor signs a restricted stock award agreement and pays the price. Unvested shares are subject to the company's right to repurchase them at the original price if the advisory relationship ends, and that right lapses as the shares vest. The schedule should match the advisor agreement, which typically runs monthly over one to two years.

The election

Without an 83(b), the advisor is taxed as each tranche vests, on the difference between its value that day and what they paid, as ordinary income. With it, they are taxed once, at the award, on the difference at that moment, which for nominally priced shares is nothing. The filing is the advisor's to make, and the deadline is thirty days from the transfer with no extension. Because an advisor is not an employee, any income is nonemployee compensation on a 1099-NEC, not wages.

What to watch

The advisor becomes a stockholder immediately, with a stockholder's rights to information and, unless the shares are non-voting, a vote. In a company with few stockholders that is a larger seat at the table than an option gives. The shares must be issued to the advisor as a natural person for Rule 701 to cover the grant. And the securities legend and transfer restrictions go on the shares, because they cannot be freely resold.

Written by the lawyers who built Arabella. This is legal information, not legal advice for your situation, and reading it does not make us your lawyers. For a real dispute or a high-stakes decision, talk to a licensed attorney. More questions.