Convertible Notes and Startup Funding
February 12, 2025
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In the previous article, we have already studied about option pools. We now know the various advantages that they offer and why they are preferred by startup companies as a means to compensate their employees. However, some companies and investors are not happy with the concept of stock option pools. This is because they dilute the voting rights and also cost the company in the form of dividends.
Many employees do not like stock options either because they have to invest some money upfront in order to obtain a monetary benefit. As a result, over the years, a new concept called restricted stock option was born. Restricted stock options work a lot like stock options but have certain relevant restrictions.
In this article, we will understand the concept of restricted stock options and how they differ from traditional stock options.
The concept of restricted stock options needs to be understood by contrasting it with regular stock options. Regular stock options allow the investor to buy a certain number of stocks at a price that is lower than the market value of the stock. This means that the employee has to pay a certain amount of cash upfront in order to realize the benefit.
Restricted stock options are a company’s promise to give the employee an amount equal to the value of the shares at a certain date in the future. Since the employee is not purchasing any stocks they need not put up any money upfront.
There are some key differences between restricted stock options and option pools. The details of these differences have been mentioned below:
The fact of the matter is that restricted stock options are preferred by companies in the later stages of their startup journey where they are sure about their cash flow and do not want to dilute the equity. Restricted stock options are a very important tool that is commonly used by mature startup companies to ensure that their workforce remains motivated and efficient.
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