In this post, we compare two of the most widely used equity compensation structures and look at how they differ.
Let's start with a short description of the two programs we'll be comparing:
Restricted Stock Awards (RSA): In Norwegian, often called "bundne aksjer", or shares with restrictions. This is an immediate grant of shares, with certain vesting conditions attached.
Stock options: A stock option gives the recipient the right, but not the obligation, to buy a set number of shares in the company in the future at a pre-agreed price.
Now let's look at the differences between these two structures.
Shareholder status 👫
RSA: The recipient owns actual shares and is therefore a shareholder from the grant date.
Options: The recipient doesn't own shares and isn't a shareholder until the vesting conditions are met and the option holder chooses to exercise the options into shares.
Voting rights 🗳
RSA: Voting rights from the grant date (assuming the shares carry voting rights).
Options: No voting rights until the options are exercised.
Dividends 💰
RSA: Right to dividends (assuming the shares carry dividend rights).
Options: No right to dividends until the options are exercised.
Cost 💸
RSA: There's usually a purchase cost for the shares. The company can choose to offer them for free or at a discount.
Options: Receiving the option itself is usually free. The cost comes when you exercise the option into shares, after the vesting conditions are met. This price is called the strike price (or exercise price), and it's set by the company when the option is issued. There are different principles for how the price is determined. Note that specific requirements apply for the Norwegian startup option scheme.
Tax 🧾
A rule of thumb for taxation in Norway: if an employee receives any benefit as a result of their employment, that benefit is taxed as income, and the company also has to pay the employer's social security contributions (arbeidsgiveravgift, AGA).
RSA:
If the employee pays market price for the shares, there's no immediate tax liability when the shares are acquired.
If the employee receives the shares outright or at a discount, an immediate tax liability is triggered. The tax is calculated on the difference between market value and the actual price paid, and is taxed as income.
Any later gain or loss on selling the shares is taxable as capital income. If the shares are held through a holding company, the exemption method (fritaksmetoden) may apply.
Options:
No tax is triggered at the grant date.
Tax is first triggered when the option is exercised into shares. The employee pays income tax calculated as:
fair market value at exercise − total exercise cost − the cost of purchasing the option (this last one is usually zero). Any later gain or loss is taxable as capital income.
If the company, the recipient, and the option all qualify under the startup option scheme introduced on 01.01.2022 (see this blog post), the tax terms are more favorable: no tax until the shares are actually sold, and the company doesn't have to pay the employer's social security (AGA) either.
Risk 📈
RSA: Because the shares are bought or owned, the holder has taken on real financial risk; the share price can go down.
Options: Options are essentially risk-free up until the point you exercise them. After exercise, you're exposed to the exercise cost, which can end up higher than the share value if the price drops below it.
Conditions
💡 It's normal for share and option programs to come with certain conditions attached. The most common and important ones are the vesting conditions; what the recipient has to meet in order to earn the right to the shares. These generally work the same way across the ESOP types covered above, and we'll dig into them in a separate post. Below are the additional conditions you'll often see specifically in option programs:
Exercise price: The price per share to be paid when the options are exercised.
Expiry: When the option expires.
Post-termination exercise window: How long the employee has to decide whether to exercise their vested options after leaving the company. There can be different reasons for leaving, and different reasons can lead to different exercise windows.
Found this useful? Want more?
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