The concept of issuing stock to someone versus giving them stock options in your company has major tax consequences. When you receive stock options, you do not exercise those options probably until you can sell the stock. Then you won’t have held the stock for 12 months, which means you are going to pay ordinary income taxes at a top bracket of about 40% federal estate taxes for California. If however you have held the stock for 12 months (not the stock options), you have exercised the option and you own the stock or the stock was issued to you more than 12 months ago, then you have capital gains treatment, which is half the tax rate. This is a significant difference. The issue is when you get your stock, if the stock is valued at much more than you pay for it, the difference between the price you pay for the stock and the actual value of the stock is called phantom income. There are tax consequences to that as well, so you need to think this through and talk to your tax people and your attorney before you issue stock options or stock.

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