Award of restricted stock: Overview, definition, and example
What is an award of restricted stock?
An award of restricted stock is a type of compensation provided to employees or executives in the form of company stock, but with certain restrictions attached. These restrictions typically limit the transferability of the stock or impose conditions on when the stock can be sold or otherwise disposed of. The most common restrictions involve vesting periods, during which the employee must remain with the company or meet certain performance criteria before they can fully own or sell the stock.
Restricted stock is often used by companies as a way to incentivize employees and align their interests with the company’s long-term goals. It is typically awarded as part of a broader compensation package, alongside salary and other benefits, to reward employees for their contributions and motivate them to remain with the company.
Why is an award of restricted stock important?
An award of restricted stock is important because it serves as both an incentive and a retention tool. By offering stock with restrictions, companies can encourage employees to stay with the organization for a specified period and achieve certain performance targets before they fully own the shares. This can help improve employee loyalty and increase motivation to contribute to the company’s success.
For employees, the award provides the opportunity to share in the company’s future growth and success, as they can benefit financially if the stock’s value increases. However, they also face the risk of forfeiting the shares if they leave the company or fail to meet the conditions set by the award.
Understanding award of restricted stock through an example
Imagine a company awards an employee 1,000 shares of restricted stock. These shares are subject to a vesting schedule, where 25% of the shares vest each year over a four-year period. This means that after the first year, the employee will own 250 shares, after the second year they will own 500 shares, and so on. If the employee leaves the company before the shares are fully vested, they forfeit the unvested shares. If the employee remains with the company and meets any other performance conditions, they will fully own all 1,000 shares after four years.
In another example, a company might grant an executive 500 shares of restricted stock, with the restriction that the shares will only vest if the company achieves a certain revenue target within three years. If the company meets the target, the executive will be able to keep the shares. If not, the shares may be forfeited.
An example of an award of restricted stock clause
Here’s how an award of restricted stock clause might appear in an employee compensation agreement:
“The Company hereby awards the Employee 1,000 shares of restricted stock, subject to the following terms and conditions: 25% of the shares shall vest on each of the first, second, third, and fourth anniversaries of the grant date, provided the Employee remains employed with the Company on each vesting date. If the Employee’s employment is terminated for any reason before the shares are fully vested, any unvested shares shall be forfeited.”
Conclusion
An award of restricted stock is a powerful tool used by companies to incentivize and retain employees by granting them shares in the company with specific conditions and restrictions. These awards typically involve vesting periods or performance requirements, ensuring that employees are motivated to contribute to the company's success over time. For employees, it provides the opportunity to benefit from the company’s growth, but with the risk of forfeiting the shares if certain conditions are not met. Understanding the terms and conditions of restricted stock awards is crucial for both employees and employers to ensure the intended outcomes are achieved.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.