Restricted stock options limit an investor’s ability to sell shares, with a vesting period that can last several years. Restricted stock grants are smaller than stock option grants and are best for stocks with static or declining prices. Non-compliance with restrictions results in a loss of vested stock rights.
Restricted stock is any type of stock option where there are limitations of some sort on the investor’s ability to offer the shares for sale to another investor. Limitations may involve holding the shares for a specified period of time after purchase before offering them for sale. At other times, the restriction may require that a certain event or series of events occur before the owner can attempt to sell the shares.
With restricted stock options, the period or events that must elapse before the shares can be sold again is known as the vesting period. Depending on the nature of the limitation, this period can be relatively short or last several years. For example, if the restricted securities were issued to an employee, the company may require the employee to stay with the company for a certain number of years in order to sell those shares after leaving the employer. If the restriction has to do with the issuing company reaching a certain level of annual sales, or the stock price rising to a specified level, the restriction is lifted as soon as those events occur.
Although restricted stock is somewhat similar to a stock option grant, there are some important differences. With the grant of the stock option, the recipient has the ability to purchase or not purchase the shares after the vesting period expires, typically at a guaranteed price. Once purchased, the investor can sell the shares immediately if they wish. With the restricted stock model, shares are either vested or purchased, then must be held until the vesting period is complete. Typically, a restricted stock grant will be somewhat smaller than a stock option grant, in terms of the number of shares granted.
Determining whether restricted stock is the best option depends on the price of the stock. If the price is currently rising in value, exercising a stock option grant, securing the shares, and then selling them at a profit is a good move. In situations where the price is somewhat static or currently declining, the security of the restricted stock agreement may be the best approach, as the stock will hold some value until the point where the price hits zero.
If a shareholder chooses not to comply with the terms and conditions that apply to restricted shares, they will incur some type of loss. An employee who does not remain with an employer long enough to be considered vested in the stock program will typically lose all vested stock rights. For this reason, it is important to understand the nature of any restrictions that apply, and what will result from failing to comply with those restrictions.
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