Restricted Stock Awards and Units
A restricted stock arrangement provides the recipient with the right to acquire a specified number of shares of a company's stock under the terms of a equity incentive plan. The recipient may be required to pay for the stock or may receive it at no cost. Browse our resources on all aspects of offering and administering restricted stock awards and units via a company stock plan.
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Overview of Restricted Stock Award and Unit Arrangements
A restricted stock arrangement provides the recipient with the right to acquire a specified number of shares of stock. The recipient may be required to pay for the stock or may receive it at no cost.
If the stock must be purchased, the purchase price is typically the fair market value of the company’s stock on the date of grant (“grant” here is used in its formal sense in a restricted stock plan and can refer to either the award of shares for no consideration or the award of the right to buy shares).
Privately held companies that offer restricted stock to their employees typically require the employees to pay full fair market value for the stock. While the company is private, the value of the stock is often relatively low, so that this price is not a significant obstacle to the employee’s purchase, and requiring payment can alleviate administrative difficulties that might otherwise arise from the tax treatment of these arrangements. In addition, the employee’s investment provides the company with additional cash that could be valuable to the operation of the company.
In a publicly held company, however, there is little incentive to employees to purchase restricted stock at full fair market value, since, presumably, they could buy the same stock on the open market at essentially the same price without regard to the restrictions.
Because of this, publicly held companies that offer restricted stock to their employees typically offer it at no cost or at a discount from the current fair market value.
Unlike employee stock options, which might provide up to 10 years for employees to purchase stock, the recipient of restricted stock must make a decision with respect to acquiring the shares of stock within 10 to 30 days after the arrangement is granted.
Where payment for the shares is required, generally the recipient may purchase the shares of stock with cash, a promissory note, or other consideration approved by the company. Alternatively, the company may simply award restricted stock at no cost to employees.
If the stock is awarded at no cost, it may be issued at grant subject to restrictions or may be awarded in the form of units that convert to shares of stock (usually on a one-for-one basis) upon distribution to the recipient.
In both publicly and privately held companies, the arrangement is granted subject to restrictions or risk of forfeiture. That is, the recipient’s right to the shares of stock covered by the restricted stock arrangement (i.e., the “restricted shares”) is contingent on continued service or contribution to the company for a specified period of time (the “vesting period”).
Alternatively, the recipient’s right to the restricted shares may be contingent upon the achievement of one or more specified performance goals.