Restricted shares: Overview, definition and example
What are restricted shares?
Restricted shares refer to company stock that is issued to employees, executives, or insiders with limitations on their ability to sell, transfer, or otherwise dispose of the shares for a specific period. These restrictions are typically placed to encourage long-term ownership and align the interests of employees with those of the company. Restricted shares are often issued as part of an employee compensation package, such as stock grants or performance-based awards. Once the restrictions are lifted, often through vesting over time or meeting certain performance milestones, the shares can be freely traded or sold.
For example, a company may grant 1,000 restricted shares to an employee with a four-year vesting period, meaning the employee cannot sell or transfer the shares until they have been with the company for that period.
Why are restricted shares important?
Restricted shares are important because they serve as an incentive for employees to remain with a company and contribute to its long-term success. By offering stock that vests over time, companies encourage employees to stay longer and work toward increasing the company’s value, benefiting both the employee and the business. For companies, issuing restricted shares can be a cost-effective way to attract and retain talent without requiring immediate cash compensation. The restrictions also prevent immediate selling, which helps stabilize the company’s stock price and ensures that the interests of the employees align with long-term shareholder value.
For employees, restricted shares can provide a valuable financial benefit once the restrictions are lifted, offering them an opportunity to build wealth while remaining committed to the company's success.
Understanding restricted shares through an example
Imagine a technology company that offers its senior executives 5,000 restricted shares as part of a compensation package. These shares are subject to a three-year vesting period, meaning the executives cannot sell or transfer the shares until three years have passed. If the executives stay with the company and meet certain performance targets, the shares vest over time and can be sold or transferred once the restrictions are lifted. If the executives leave the company before the vesting period is complete, they forfeit any unvested shares.
In another example, an employee at a startup is granted 500 restricted shares as part of their compensation. The shares are subject to performance-based restrictions, such as the company reaching a specific revenue milestone or the employee achieving certain goals. Once the milestones are met, the employee is allowed to keep the shares and sell them if they choose.
An example of a restricted shares clause
Here’s how a restricted shares clause might appear in an employment agreement or stock grant agreement:
“The Company agrees to grant the Employee 1,000 restricted shares of Company stock, subject to the following terms and conditions: (i) the shares will vest in four equal installments over the next four years, with 25% of the shares vesting each year on the anniversary of the grant date; (ii) the Employee may not sell, transfer, or assign the shares until they have vested; and (iii) if the Employee leaves the Company before the shares are fully vested, they will forfeit any unvested shares.”
Conclusion
Restricted shares are a form of compensation that incentivizes employees, executives, and insiders to remain with the company and contribute to its long-term success. By offering shares with restrictions on transfer or sale, companies can ensure that employees have a vested interest in the company’s performance and stability. For employees, restricted shares can be a valuable opportunity to accumulate wealth over time, contingent on meeting the requirements set forth by the company. Understanding the terms and conditions of restricted shares is essential for both employers and employees to maximize their benefits and fulfill their obligations.
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.