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Restricted Stock FAQ

Frequently Asked Questions (FAQ)

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Question: What is restricted stock?
Answer: Stock is ownership of a company. When that stock has limitations on it, it is said to be restricted.

Question: What kind of restrictions?
Answer: One of the most common restrictions requires a certain length of time to pass or a certain goal to be achieved before the stock can be sold. This is the vesting period.

Question: What is a vesting period?
Answer: The vesting period is the length of time before the restrictions are lifted. If the restricted stock is awarded based on the employee remaining with the company for two years, those two years are the vesting period. If the stock vests when "gross sales increase beyond $30 Million" the vesting period is however long it takes for that to happen, if it ever does.

Question: What happens if I leave the company before my stock vests?
Answer: You forfeit the stock.

Question: How does a restricted stock award differ from a stock option grant?
Answer: Both have a vesting period. The difference is at the end of the vesting period. When a stock option vests, you have the option of purchasing or not purchasing the stock at a specific price (the strike price). You do not own any company stock until you exercise the option and purchase the stock. As soon as you purchase it, you can do anything you want with it, including sell it. When a restricted stock award vests, you own the stock and you can do whatever you want with it.

Question: Which is better, stock options or restricted stock?
Answer: That depends on the change in the stock price. Generally, if the stock price is going up, stock options are a little better. You can sell both at the higher market value, but with stock options you have not had to commit to the purchase until the stock price reached the point at which you wished to sell. However, if the stock price stays the same or goes down, restricted stock is better. Since you actually own the stock, it retains some value until the stock price goes to zero.

Question: Are restricted stock awards the same size as stock option grants?
Answer: Generally, restricted stock awards are smaller than stock option grants by a factor of two or three (one half or one third the size). If a stock option grant were 100 shares, a restricted stock award would usually range from 33 to 50 shares. This is because at the end of the vesting period the 33 to 50 shares would still have some value and the 100 stock options might not.

Question: Are there tax considerations with restricted stock awards?
Answer: Yes. Be sure to consult a qualified accountant or attorney.

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