When would a company use restricted stock awards (RSAs) instead of stock options?
Takeaway: The choice between an RSA and a stock option is driven almost exclusively by the stock's value; RSAs are the superior tool at the very beginning of a company's life when the stock has a near-zero value, making a direct purchase feasible.
While stock options are the workhorse of startup equity compensation, the Restricted Stock Award (RSA) is a specialized tool that is perfectly suited for a very specific, and very important, moment in a company's lifecycle: the very beginning. The decision to use an RSA instead of a stock option is not about the recipient's seniority or role; it is a pragmatic choice driven entirely by the Fair Market Value (FMV) of the company's common stock at the time of the grant.
The Deciding Factor: Price Per Share
The fundamental difference is that an RSA is a direct purchase of stock, while an option is a right to buy stock in the future. This means that to receive an RSA, the individual must pay the full fair market value for the shares upfront.
At Incorporation (Near-Zero Value): When a company is first incorporated, before it has raised any money or built anything of value, the FMV of its common stock is effectively zero (e.g., $0.00001 per share). In this scenario, an RSA is the ideal instrument. A founder or a very early employee can purchase millions of shares for a nominal cash outlay (e.g., $100). They immediately become a stockholder, file their critical 83(b) election, and start the clock on their long-term capital gains and QSBS holding periods. This is the simplest, most tax-efficient way to grant equity at the inception of the company.
Post-Financing (Real Value): Once the company has raised capital and its 409A valuation has established a real, tangible FMV for its common stock (e.g., $1.00 per share), granting RSAs becomes impractical and financially burdensome for the recipient.
The RSA Problem: If you wanted to grant an engineer a 0.5% stake in a company with 10 million fully-diluted shares (a 50,000 share grant) where the stock is worth $1.00 per share, an RSA would require that engineer to write a check to the company for $50,000 to purchase their restricted stock. Very few employees have that kind of cash on hand.
The Stock Option Solution: In this scenario, a stock option is the clearly superior tool. The option gives the employee the right to buy those 50,000 shares at a fixed price of $1.00 per share, but it does not require them to pay anything upfront. They can wait for their options to vest and then decide when to exercise them in the future, hopefully after the value of the stock has increased significantly.
A Simple Rule of Thumb
Think of it as a clear line of demarcation:
Pre-409A / Pre-Funding: Use Restricted Stock Awards (RSAs) for founders and the first few key hires when the stock value is negligible.
Post-409A / Post-Funding: Switch to using Stock Options for all new equity grants once the stock has a real, tangible fair market value that would make an upfront purchase prohibitive.
This simple, valuation-driven strategy ensures that you are always using the right, most efficient equity instrument for your company's specific stage of development.
Disclaimer: This post is for general informational purposes only and does not constitute legal, tax, or financial advice. Reading or relying on this content does not create an attorney–client relationship. Every startup’s situation is unique, and you should consult qualified legal or tax professionals before making decisions that may affect your business.