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- Restricted Shares vs. Stock Options: What's the Difference?!
The shares may be restricted by a double-trigger provision. That means that an employee's shares become unrestricted if the company is acquired by another and the employee is fired in the restructuring that follows. Insiders are often awarded restricted shares after a merger or other major corporate event. The restrictions are intended to deter premature selling that might adversely affect the company. An executive who leaves the company fails to meet performance goals or runs afoul of SEC trading restrictions may have to forfeit their restricted stock.
Both are awarded to motivate employees, but restricted shares are most often granted by established companies, while stock options are popular with startups. Employee stock options are a promise of future profits that might or might not pan out. They are often granted by startup companies that have not yet gone public and want to motivate employees to get the company off the ground.
Stock options do not involve a transfer of ownership. They are a right to buy shares at a specific price at some future date. The employee profits by the difference between the option price and the actual market price. Stock options are normally restricted by a market standoff provision, which restricts the sale of shares for a certain period of time after an initial public offering IPO to stabilize the market price of the stock.
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Skip To Main Content. Restricted stock units A restricted stock unit is a substitute for an actual stock grant. Stock grants With a stock grant, a company provides you with stock shares rather than a unit that gives you a future right.
Selling your stock You'll likely have to pay taxes again if you sell stock you received through an RSU or a stock grant. Here are the different ways you can be taxed: If you sell the stock at a higher price than its fair value at the time of vesting, you'll have a capital gain If you hold the stock for less than one year, your gain will be short term, and you'll owe ordinary income tax on it If you hold the stock for one year or more, your gain will be long term, meaning you'll pay tax at the more favorable capital gains rate.
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Paying your taxes Since stock you receive through stock grants and RSUs is essentially compensation, you'll usually see it reported automatically on your W Got investments? State additional. Looking for more information?
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Get more with these free tax calculators and money-finding tools. Whereas unrestricted stocks are often considered to be short-term incentive rewards because they can be immediately sold, restricted stocks are usually considered to be long-term incentives given the length of their vesting periods the length of time the stocks must be legally held before they can be publicly sold. However, there is disagreement about the actual effectiveness of restricted stocks as long-term incentives.
Restricted stocks are also often granted to insiders after corporate mergers and acquisitions to prevent adverse effects on company performance. Venture capitalists are also often given restricted stocks in pre-initial public offerings to help ensure long-term commitment. The second type of restricted stock is also commonly used in company compensation plans as incentives or rewards for employee performance or service.
These stocks are similar to unrestricted stocks in the sense that they are not legally restricted. However, they are restricted in the sense that they cannot be transferred or sold by employees until they have fulfilled certain conditions set by the company. These conditions are often related to specific employee performance goals or are satisfied after an employee remains with a company for a set period of time.
For example, a company may grant one thousand shares of restricted stock to an employee who can sell those shares when a certain performance goal is fulfilled.
Stocks, Restricted and Unrestricted
Alternatively, it may grant one thousand shares of restricted stock to an employee who can sell those shares two years after the date the shares were issued. Although both restricted and unrestricted stocks have long played a role in executive compensation packages, the popularity of restricted stocks increased dramatically in the United States after the passing of the Sarbanes-Oxley Act, which required companies to expense stock options granted to all employees through compensation plans. Besner, Gregory.
Restricted Stock: Regulations, Trends and Technologies. Compensation and Benefits Review 36 1 — Ellig, Bruce R. Compensation and Benefits Review 38 2 — Longnecker, Brent M. The Power of Restricted Stock. Updated ed. Scottsdale, AZ:WorldatWork. Cite this article Pick a style below, and copy the text for your bibliography.