equity, stock-optionsWhat are the differences between equity and stock options?
Equity (assuming you mean stock or shares in the company) is ownership of a piece of the company. This ownership comes with corporate rights under the corporate laws where the company is chartered (e.g., the right see stockholder lists, dissenter rights, notice rights, voting rights, etc.).
Options are the right to buy the shares. This means the owner of the option has a contract with the company to buy the shares. This also means that the rights you have are those specified in the contract, and not the rights under the company’s corporate law. This generally means no voting rights, no rights to see the list of stockholders, no notice rights regarding corporate actions, no dissenter rights, etc.
Also, when the company sells, options are usually cashed out, and for employees the payment is run through payroll with associated payroll taxes (and ordinary income taxes). Shares usually result in (more favorable) capital gains taxes (long or short depending on the holding period), instead.
Options can be exercised by paying the company the exercise price to buy the shares, thus becoming a shareholder. Most startup option plans require option holders to exercise the options within a short period of leaving the company, or the options expire (with no further rights).
Vesting often applies to both shares and to options. For shares, this allows the company to repurchase the shares at the price originally paid for the shares. For options, the unvested portion just expires.
Technically, stock options are a form of equity, as in an ownership interest in property.
You’re probably referring to equity vs stock options as stock vs stock options. Stock is owned no ifs no buts (unless vested). Stock options, in contrast, are a futures contract – or an investment vehicle, if you prefer. When you get stock options, the company promises to offer you the ability to purchase stock at a predefined price at some point in the future.
In practice, a company usually reserves money aside to repurchase your stock on the spot – and in this sense you could argue that stock options are a bit like a check with a yet to be determined face value – but you’re not obligated to sell your stock back to the company when you exercise your stock options. (I suddenly have doubts though. Perhaps some US companies actually do that?)
Stock options are documents that allow you to buy shares under successful conditions, but may also just expire after some time you leave the company. If you “exercise” when leaving the company, you may need to pay cash for converting them into real equity, and in case you have lots of options, the required sum may exceed that you can afford.
If the employee once lost all his options due mentioned restrictions, they may no longer appear to him a viable alternative to shares, cash or higher positions.
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