Restricted stock definition
/What is Restricted Stock?
A restricted share is stock that cannot be sold, due to a limitation associated with that specific share. For example, an agreement between the issuer of stock and an investor may stipulate that the investor cannot sell the shares for a period of three years. Or, shares that have not been registered with the Securities and Exchange Commission cannot be sold by the investor, unless a stock sale exemption (such as Regulation A or Rule 144) applies.
Types of Restricted Stock
Here are several types of restricted stock:
Restricted stock awards. Shares granted to employees at no cost or a nominal price, subject to vesting conditions such as time-based or performance-based requirements.
Restricted stock units. A promise to deliver company shares (or cash equivalent) in the future once vesting conditions are met, without immediate ownership rights.
Time-based restricted stock. Shares that vest after a specified period of continued employment (e.g., 3-5 years).
Performance-based restricted stock. Vesting depends on achieving specific company or individual performance metrics, such as revenue growth or earnings per share targets.
Market-based restricted stock. Vesting is tied to stock price performance or market conditions, such as outperforming an index or reaching a target stock price.
Hybrid restricted stock. A combination of time-based and performance-based vesting conditions to align employee incentives with company goals.
Double-trigger restricted stock. Shares that vest only when two conditions are met, often requiring both continued employment and a company event like an acquisition or IPO.
Cash-settled restricted stock. Instead of receiving actual shares, employees receive a cash payout equal to the stock’s value upon vesting.
Cliff-vesting restricted stock. Shares vest all at once after a set period, rather than gradually over time.
Graded-vesting restricted stock. Shares vest in increments over a period, allowing employees to gradually gain ownership.
Each type of restricted stock is designed to retain talent and align employee incentives with long-term company performance.
The Vesting of Restricted Stock
Restricted stock can refer to shares that have been awarded to an employee, but which cannot be sold until certain conditions have been met, such as continuing to work for the employer for several additional years. Thus, if the person leaves the company before fulfilling the associated terms and conditions of the stock award, then no stock will be granted. This approach keeps the objectives of the employee and the company aligned through the vesting period.
Disadvantages of Restricted Stock
A key disadvantage of stock that has been restricted due to a mandatory vesting period is that the employee receiving the stock has no incentive to perform - only to stay with the company. This means that the recipient could even elect to perform relatively poorly, and yet will still receive the stock merely by remaining employed for the designated period of time.