Companies provide stock to non-employees for many of the same reasons that they provide stock to employees. Virtually all forms of equity instruments can be shared with non-employees. This discussion is intended to be of a general nature. That is, the rules covering stock options also apply to grants of stock and other forms of equity instruments issued to non-employees. However, it should be noted that only employees can receive incentive stock options.
Most companies grant fewer shares of stock to non-employees than to employees.
One of the reasons for this is the more favorable accounting treatment given to equity instruments granted to employees. Equity instruments provided to non-employees result in compensation expense equal to the fair market value of the stock issued or the fair market value of the services rendered, whichever is more readily determinable. Over the years, practice has evolved such that many individuals who are not formally employees of a company are considered employees. As part of this project, the FASB is expected to conclude that only Common Law employees may be treated as employees for purposes of accounting for stock options. As a result, non-employee Directors will no longer be treated as employees.