how restricted stock works
restricted shares provide employees with a stake in their companies however they have no value until they vest that is until a waiting period is over or a company milestone is met vesting gives employees an incentive to perform well and remain with a company the vesting schedule a company sets up determines when employees acquire full ownership of the asset in this case restricted stock units rsus the rsus are assigned a fair market value at the time of their investing restricted stocks became more popular in the mid 2000s as companies were required to expense stock option grants restricted stocks are a form of employee compensation and typically become transferable after satisfying certain conditions such as continued employment for a period of time or the achievement of particular product development earnings or other financial goals an employee might give up restricted stock should they leave the company miss certain performance targets or fail to adhere to regulations from the securities and exchange commission insiders are often given restricted stock after mergers and acquisitions underwriting activity or changes in ownership to prevent premature selling that might negatively affect the company employees might forfeit restricted stock if they leave the company fail to meet corporate or individual performance goals or run afoul of sec trading restrictions the sec regulations that govern the trading of restricted stock are outlined under sec rule 144 which describes the registration and public trading of restricted stock and the limits on holding periods and volume 1these shares can have a double trigger provision that means that an employee s shares become unrestricted if the company is acquired by another and the employee is let go in the restructuring that follows restricted stock units vs restricted stock awardstwo variations on restricted stock are restricted stock units rsus and restricted stock awards a restricted stock unit is granted to an employee and represents the promise to give a certain number of shares of the company s stock at a predetermined time in the future since rsus are not actually stocks but only a right to the promised stock they carry no voting rights an rsu must be exercised to receive the stock once converted the stock carries the standard voting rights for the class of stock issued a restricted stock award is like an rsu however it comes with voting rights because the employee owns the stock immediately once it is awarded in addition though an rsu represents a right to stock in some cases an employee can elect to receive the cash value of the rsu instead this is not the case for restricted stock awards which cannot be redeemed for cash restricted stock vs employee stock optionsrestricted stock and employee stock options are forms of equity compensation furnishing employees with shares in their company however restricted stocks are different from stock options which are derivatives that outside investors can trade the key difference between restricted stock and employee stock options is that restricted stocks do not have an exercise price instead employees automatically receive shares when the restricted stock vests with employee stock options the employee must pay the exercise price of the option to receive the shares another difference is that stock options are typically awarded on a set schedule while restricted stocks can use a fixed schedule as well or vest if the employee makes specific performance benchmarks restricted stocks and employee stock options are also taxed differently restricted stocks are taxed after vesting while stock options are taxed when exercised advantages and disadvantages of restricted stock