Restricted Stock Awards
When companies opt for restricted stock, they are making a conscious decision to move away from offering options and to granting awards. What this means for the employee in practical terms is that they are not being asked to exercise anything; instead, the process is simplified and they automatically receive shares after an agreed period of time has elapsed and/or key performance objectives have been achieved.
Within this category, companies will tend to use either Restricted Stock Awards (RSAs) or Restricted Stock Units (RSUs).
With RSAs, shares are issued to plan participants at the outset, but recipients cannot sell them until they vest, with vesting often linked to a time-based clause. Depending upon the circumstances, employees will receive these shares for either no cost, at a discount, or at fair market value (the accepted current value of the stock).
RSUs are different in that they represent a pledge that shares will be assigned in the future, as opposed to receiving them at the outset. This pledge will be linked to the employee achieving specific performance goals and/or staying with the company with the company for a specified number of years.
Similar to options, restricted stock awards have a grant date, vesting start date and a vesting schedule applied to them.
Benefits of restricted Stock
Restricted stock is generally regarded as offering less risk and clearer value than some other types of equity compensation. While the value of options will depend on how much the company’s stock price rises over time, restricted stock will nearly always have some value once it vests, even if the stock price falls after the grant.
You face fewer decisions. With options, you have to think about when to exercise, whereas with restricted stock, the shares get released to you whenever they vest, and then at that point, your main focus will be on how to deal with the tax implications, and how best to minimise that burden.