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Restricted stock options and what to know before making a decision.

February 23, 2023

Restricted stock options are a type of equity-based compensation that companies offer to their employees.  When an employee is granted restricted stock options, they have the right to purchase a specified number of the company’s stock at a predetermined price.  However, as the name implies, there are restrictions, such as the employee cannot sell or transfer the stock until certain conditions have been met.  These conditions include the passing of a specified period of time or the achievement of certain performance targets. 

Before making a decision about exercising your restricted stock options, several key factors should be considered:

  1. Vesting Schedule: The vesting schedule outlines the conditions that must be met in order to exercise the restricted stock options. It is important to understand the vesting schedule and ensure you have met the conditions before exercising the options.
  2. Strike Price: The strike price is the price at which the stock can be purchased. It is important to consider the current market price of the stock and the strike price to determine whether exercising the options makes financial sense.
  3. Tax Implications: When restricted stock options are exercised, the difference between the strike price and the market price of the stock is considered taxable income. It is important to understand the tax implications of exercising the options and consider how this will impact your financial situation.
  4. Company Performance: The value of your restricted stock options will be directly tied to the performance of the company. Before making a decision, it is important to consider the financial health of the company, its future prospects, and any potential risks.
  5. Liquidity: Restricted stock options can be difficult to sell or transfer, especially if the company is not publicly traded. It is important to consider the liquidity of the options and to understand the steps needed to sell the stock in the future.

Restricted stock options can be a valuable form of equity-based compensation, but it is important to consider the factors outlined above and it may be beneficial to consult with a Financial Advisor before deciding whether to exercise them or not.

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