Restricted Stock (Restricted Securities)

Shares in a company typically granted to select employees under specified conditions, such as tenure or performance targets, often employed as an alternative to share option schemes.
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Definition

Restricted stock, also known as restricted securities, are shares granted to employees that are subject to certain restrictions, such as a vesting period or performance milestones. Employees do not own these shares outright until they satisfy the specific conditions.

Key Features of Restricted Stock:

  1. Vesting Period: A time-based condition where the employee must stay with the company for a predetermined number of years.
  2. Performance Targets: Conditional ownership based on meeting individual or group performance goals.
  3. Transfer Restrictions: During the restriction period, the stock cannot be sold or transferred.
  4. Dividends and Voting Rights: Employees might have the right to dividends and voting rights during the vesting period.

Examples

  1. Time-Based Vesting: An employee receives 1,000 restricted shares, which vest entirely after five years of continuous employment. If the employee leaves the company before five years, they forfeit the shares.
  2. Performance-Based Vesting: A manager is awarded 500 restricted shares that vest if the company achieves a 10% growth in revenue over three years. If the target is met, the shares vest; if not, they are forfeited.

Frequently Asked Questions (FAQs)

What happens if an employee leaves the company before restricted stock vests?

If an employee leaves the company before the stock vests, they typically lose the shares. Each company’s policy and the specific terms of the restricted stock grant will dictate the exact rules.

Are restricted stocks taxed?

Restricted stocks are subject to taxation. The taxation event typically occurs when the shares vest, based on their fair market value at that time. Employees may also elect to be taxed at the grant time by filing an 83(b) election with the IRS.

Can restricted stock be sold or transferred?

Restricted stock cannot be sold or transferred until the vesting period or performance targets are met, and any other restrictions are lifted.

Do employees with restricted stock get dividends?

Employees may receive dividends on restricted stock even before it vests, depending on the terms of the equity award agreement.

How does restricted stock differ from stock options?

Restricted stock grants actual shares with restrictions, whereas stock options provide the right to purchase shares at a predetermined price after meeting certain conditions.

  • Stock Options: A benefit in which the employee has the option to buy company stock at a future date at a preset price.
  • Vesting Period: The time duration an employee must wait to gain access to benefits such as stock or retirement funds.
  • Performance Targets: Specific goals that employees must meet to earn bonuses or the vesting of stock and other incentives.
  • Share Incentive Scheme: A program designed to grant employees shares or share options as part of their compensation.

Online Resources

Suggested Books for Further Studies

  • “Equity Compensation Strategies for Executives and Employees” by Scott A. Fithian
  • “Principles of Private Firm Valuation” by Stanley J. Feldman
  • “Stock Options & Restricted Stock” by Corey Rosen

Accounting Basics: “Restricted Stock” Fundamentals Quiz

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Restricted Securities