Legal Definitions - restricted stock

Restricted stock refers to shares of a company's ownership that are granted to an individual, typically an employee, but come with certain limitations or conditions. These conditions usually prevent the recipient from selling or transferring the shares until specific requirements are met, such as remaining employed for a certain period or achieving particular performance goals. Once these conditions are satisfied, the stock is said to "vest," and the restrictions are lifted, allowing the recipient full ownership and the ability to sell or transfer the shares freely.

Here are a few examples to illustrate how restricted stock works:

• Example 1: Employee Retention Incentive

  A rapidly growing tech startup offers a new software developer 1,000 shares of restricted stock as part of their compensation package. The terms state that these shares will vest over four years, with 25% vesting each year on the anniversary of their start date. This means the developer cannot sell any of these shares until they have completed at least one year of employment, and they will only gain full ownership of all 1,000 shares after four years. The company uses this restricted stock to incentivize the developer to stay with the company long-term and contribute to its success.

• Example 2: Performance-Based Executive Compensation

  The board of directors for a publicly traded manufacturing company grants its CEO 50,000 shares of restricted stock. However, these shares are not tied to time alone. Instead, they are structured to vest only if the company achieves specific financial targets over the next three fiscal years, such as increasing annual revenue by 15% and improving profit margins by 5%. If these performance metrics are not met, some or all of the restricted stock may be forfeited. This arrangement ensures that the CEO's compensation is directly aligned with the company's strategic goals and overall financial performance.

• Example 3: Post-Acquisition Integration

  When a large pharmaceutical company acquires a smaller biotech firm, it offers the key research scientists from the acquired firm 2,000 shares each of restricted stock in the acquiring company. These shares are set to vest over two years, provided the scientists remain employed with the combined entity. This strategy serves a dual purpose: it helps retain critical talent from the acquired company, ensuring a smooth integration and continued innovation, and it aligns the financial interests of the former biotech employees with the success of the larger pharmaceutical company.