If you started a business, or recently joined a startup, there is a strong likelihood that a portion of your overall compensation package (or the compensation package offered to new hires) will include stock options and/or stock warrants. It is important to understand the key differences between these stock instruments to ensure comprehension of what will follow when a stock option or stock warrant is offered to a new employee, or as an investor on boarding with a startup.
In most instances, companies will offer stock options to specific employees, consultants, and directors, in exchange for services rendered to the company. If you, as a business owner, are interested in offering stock options to your employees, it is important to have a formal, detailed stock option plan in place. When you have a stock option plan, it can provide specific details about the stock options (and often restricted stock) that you are offering to one or more of your employees, consultants, or directors.As a result, stock options are considered to be a compensatory financial instrument.
Stock warrants, in contrast, are typically not considered to be compensatory financial instruments. Instead, stock warrants are often issued in relation to a company working to raise capital (generally through debt or equity securities). In most transactions, stock warrants are utilized as a proverbial “sweetener” to help close a deal with an investor. For example, let’s say Startup X is trying to raise capital through a Series A Round and is trying to incentivize the first few investors who join the deal by offering extra incentives. Startup X could offer stock warrants that would be issued to these investors to purchase a specific number of shares of the startup’s common stock at a specific dollar amount per share. The stock warrant would then be issued in connection with a capital transaction.
Have Questions? Contact an Experienced Business Lawyer in Los Angeles Today
When it comes to issuing stock options and/or stock warrants; companies and investors need to understand the key differences between these two instruments due to the potential tax consequences associated with issuing these types of stock options and warrants to new hires and/or investors.Hence, it is in your best interest to consult with an experienced business lawyer in Los Angeles about the best option suited for your business.
The highly reputable professionals at Hakim Law Group are experienced business lawyers in Los Angeles who are well versed in corporate law and capable of offering strategic and legal advice at every stage of a company’s life cycle. This level of diverse legal and business experience is what sets HLG apart from the competition. For further information or schedule a consultation please contact Hakim Law Group at (310) 993.2203 or visit www.HakimLawGroup.com to learn more.