Comparing ownership rights and capital requirements
A contractual right to buy a fixed number of shares at a set price, called the strike price, within a set period, defines this instrument. That right is a stock option, and the holder becomes a shareholder only when they exercise it and pay the strike price. A direct share grant makes the recipient a shareholder immediately, with full voting and economic rights from day one, subject to any vesting or buy back terms in the shareholder agreement.
- Options: no cost to hold, cost to exercise, shareholder only after exercise
- Shares: shareholder immediately, may need to pay market value or accept a taxable benefit
- Options are usually forfeited if the holder leaves before vesting completes
- Shares granted for free or below market value can trigger an immediate tax charge on the discount
Comparing tax moments at grant and exercise
With shares, tax usually falls due when they are granted or acquired, based on the difference between what was paid and the market value at that time. This can create a tax bill before there is any cash from a sale. With options, in most European countries there is no tax at grant. Tax typically arises at exercise, on the difference between market value and strike price, with a further capital gains charge when the shares are eventually sold, a pattern set out in full under equity tax by country.
| Event | Stock options | Direct shares |
|---|---|---|
| Grant | Usually no tax | Tax may apply on discount to market value |
| Exercise or vesting | Tax on gain over strike price in most countries | Not applicable, already a shareholder |
| Sale | Capital gains tax on further increase | Capital gains tax on full gain since acquisition |
Exact tax treatment varies significantly by country and by whether a qualifying scheme is used. This is general information, not tax advice, and recipients should check local rules before accepting a grant.
Cash cost and dilution
Suppose a company grants 1,000 units when shares are worth 1 euro each. With options set at a 1 euro strike price, the holder pays nothing until exercise, and even then only 1,000 euros total, deferring cash outlay for years. With a direct grant of 1,000 shares at no cost, the holder may owe income tax on the full 1,000 euro value straight away, with no cash received to cover it.
Dilution to existing shareholders is the same in both cases once the shares are issued, 1,000 new shares are 1,000 new shares. The difference is timing: options dilute the cap table only when exercised, so unexercised option pools understate fully diluted ownership until they are used.
Choosing between options and direct equity grants
- Options suit employees who cannot afford an upfront tax bill or purchase price
- Options suit companies that want to delay dilution and keep the cap table simple until exercise
- Direct shares suit founders and very early hires who want full shareholder rights and are willing to accept tax now for lower value now
- Direct shares suit jurisdictions with generous reliefs for founder shares acquired at low value, such as growth shares structures
Options or shares: what people ask first
- Can a company offer both to different people?
- Yes. It is common to give founders and very early hires direct shares while granting options to later employees, as long as the cap table and option pool are tracked consistently.
- Do options avoid tax entirely?
- No. Options usually defer tax rather than avoid it. Tax is typically due at exercise and again on any further gain at sale.
- Which costs the company more?
- Neither instrument costs the company cash directly. The main company level costs are legal setup, valuation work, and any employer tax or social charges due at exercise or vesting, which vary by country.
General information for founders, not legal or tax advice. Thresholds and rates change, so confirm the current position with an adviser in the relevant country before granting.