Which Is The Best Choice For You—Restricted Stock or Incentive Stock Options?

Which Is The Best Choice For You—Restricted Stock or Incentive Stock Options?

June 05, 2018

If you are starting a new position within the life sciences industry, the best time to negotiate your compensation package is before you sign on the dotted line. In most cases, your package will include some form of equity compensation, such as restricted stock or incentive stock options (ISOs).

One frequent question I hear from my clients is whether it’s better to ask for restricted stock grants or ISOs. While fewer companies are willing to offer a choice, if you do have the option of negotiating your equity compensation package, the answer to this question will depend on your financial goals, tolerance for risk, and investment time horizon.

Restricted stock may be preferable if you have a lower tolerance for risk, as you will receive shares of company stock upon vesting. These shares can then be sold to generate cash or help you pay for big-ticket items, such as college tuition bills or a down payment on a vacation home.

Restricted stock may also be a better option if you are closer to retirement and can’t stomach the additional risk and volatility of stock options.

Stock options may be a better choice for you if you have a higher tolerance for risk and sufficient cash flows. If you are bullish on your company’s stock and believe the value of your options will continue to rise, don’t need cash to pay for short-term goals, and are on track for retirement, stock options may be the right choice for you.

If possible, negotiating a combination of restricted stock and stock options may provide an opportunity for growth, as well as the security that comes with owning actual shares of company stock.