Understanding Restricted Stock

Restricted stock is a type of stock that is commonly issued to executives in companies instead of traditional stock. This type of stock does not carry with it the same rights as traditional common stock. Here are the basics of restricted stock and how it works.

Restricted Stock

Companies will issue you restricted stock to executives and the company that have insider information. This type of stock cannot be sold to another individual. Instead, it has to remain in the ownership of the individual that it was issued to until it is redeemed. By providing these executives with restricted stock, it gives them an incentive to perform well for the company. They cannot trade it to others in the market, but it still gives them an incentive to act appropriately. By giving them stock instead of a cash bonus, it forces them to make decisions as if they were a partial owner in the company instead of simply an employee. By having a shared stake in the company, these executives will most likely perform differently overall.

Restricted stock also carries with it voting rights. This makes it a different type of stock than phantom stock which is sometimes issued to employees in order to provide them with financial incentives.

In some cases, individuals who have restricted stock may have to forfeit it back to the company. When receiving restricted stock, these individuals have to agree to specific terms and conditions. If these terms are not met, the individual will have to give the stock back to the company without receiving any financial compensation for it. The most common example of this happening is when they leave the company or they are fired. They may also be required to meet personal performance standards in order to keep the stock. This keeps them accountable and it also helps keep them motivated.

Vesting

This type of stock is generally granted on a vesting schedule. This means that they do not have full access to the stock immediately. They have to work at the company for a certain amount of time and after every year of service, they get more of the rights to the stock. 

Taxation

With restricted stock, the taxation works a little bit differently than with traditional stock options. For example, when an executive receives stock options, they take into account the date of sale or the date of exercise of the options. With restricted stock, the taxation begins once the vesting schedule has been completed. This is when it is considered to be the property of the executive.

These individuals also have the option to report this stock as if it were regular income on the day that they are granted the shares. They do not necessarily have to wait until the vesting schedule is complete to pay for the taxes. This way, they can get that part out of the way so that once the vesting is complete, they will have full access to the money.

 

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