As publicly traded companies move away from stock options as a way to reward and motivate their employees, there’s a growing trend to issue “restricted stock” as an alternate compensation choice.
Unlike options that give employees an opportunity to buy into a company, restricted stock is direct ownership from day one. However, because of various limitations placed upon this type of stock, it is deemed restricted in nature.
These restrictions usually begin with a vesting period that determines when the stock can be sold. The vesting period can be determined by a time period or by certain goals that must be met. A typical time period might be 4 years of employment with the company before you can sell your shares. If you leave prior to vesting, then you will forfeit the restricted shares. In concept this is not unlike the vesting and forfeiture components of qualified pension plans.
When vesting is set by a goal, a time period may be irrelevant. For example, vesting may happen when sales exceed $150 million regardless when this occurs.
Once vested, you gain actual ownership of the stock. On the other hand, vesting in options doesn’t give you ownership, but only the right to exercise the options to gain ownership. Many employers believe this gives restricted stock a motivtional edge in directing their efforts toward company goals.
Also, consider that options can expire and become worthless. A downturn in company stock price can make the exercise of options unprofitable. Restricted stock always has the intrinsic value of the market price. Even with a dip in price, you can cash out your restricted stock with a profit. An option with a strike price of $25 doesn’t have any value if the stock is trading at $20 per share. Your restricted stock would still be worth $20 whatever the price at which it was granted.
Many companies are starting to replace their option programs with restricted stock awards. If you have been granted options in the past, restricted stock may well be part of your future.
Note, too, that the tax treatment of restricted stock is a little bit complicated. For this reason, it is recommended that you consult with a competent tax advisor whenever you are awarded any restricted stock.
C.L. King & Associates is a full-service investment bank and self-clearing broker-dealer founded in 1972. We guide clients through the sale of restricted and control stock and can sell your securities discreetly, with minimal market disruption. C.L. King has the experience to simplify the overwhelming paperwork and reporting responsibilities required by the SEC for the sale of restricted securities and can partner with your legal team to deliver immediate notification of completed transactions.
Contact us and we will guide you in achieveing your investment goals.
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