What is Restricted Stock?
Restricted Stock is generally a grant of stock to service provider, usually founders, employees, consultants or advisors, that is subject to certain contractual restrictions until it vests. These shares are usually subject to forfeiture or repurchase option by the employer and not transferable within a specified period of time. The forfeiture or repurchase of the restricted stock by the employer could occur on different types of events, typically, the termination of the employment or service relationship, or the failure of accomplishing certain performance goals before the the stock vests. The lapse of the restriction period is called vesting, after the restriction period lapses, the stock will not be subject to the risk of forfeiture any more, meaning the stock is fully vested.
Why Company Issues Restricted Stock?
Restricted Stock is most common among founders in a startup, the vesting schedule would to some extend ensure that the founders will provide continuous services to the company. Often times, institutional investors will demand the founders to enter into a restricted stock agreement with the company as one of the conditions of their investment. In some cases, restricted stock could also be awarded to employees, consultants or board advisors as a type of equity compensation in consideration of their services rendered to the company. It should be noted that when granting equity compensation, a private startup company should evaluate the federal securities law exemptions since the issuance of equity to an employee or consultant may be considered an offer and sale of securities. Rule 701 of the 1933 Securities Act is the most widely used exemption for private startup company to rely on when issuing equity compensation to employees and consultants. The basic requirement of Rule 701 exemption is that the company shall issue the stock under a “written compensation plan”. Therefore, it’s advisable to have the shareholders and board of directors adopt and approve a comprehensive stock incentive plan before granting any restricted stock or any other equity compensation to the employees, consultants or advisors (other types of equity compensation may include incentive stock options, non-statutory stock options, restricted stock units, stock appreciation rights etc.)
Federal Tax Consequences to Grantee
Upon grant of restricted stock, the grantee may need to decide whether to file 83(b) election with IRS for receiving the restricted stock. The rationale for filing the 83(b) election is to earlier recognize the ordinary income of the restricted stock at the grant, rather than upon the restricted stock is vested, to avoid the unfavarable tax results if the stock value increases significantly when vested. It’s always advisable to file the 83(b) election if you anticipate the stock value will increase significantly when vested, in addition, if you have paid fair market value for the stock at grant, there will be no recognized income at the grant. On the other hand, if at the time of grant the purchase price is nominal or substantially lower than the fair market value of the stock, you may put the money of paying tax upfront at risk by making the election, since the value of the stocks might decrease after the stocks are vested, and worst scenario you might lose all the stocks if you are fired by the company before the stocks become fully vested. We have another article explaining why and when you should file 83(b) election here.
被授予限制性股票时，被授予者应考虑是否向联邦税务总局做83(b) Election. 这样做的好处是可以提前实现税务所得，而不是等到股票完全兑现时对该限制性股票报税，以避免股票增值带来的不利税务后果。如果你预期手里的股票很可能会升值，那么建议拿到限制性股票后最好做83(b) Election, 而且，如果你在被授予该限制性股票时支付了公平市场价，那么该限制性股票也就不会产生税务所得。另一方面，如果在授予限制性股票时，你支付的价格远低于股票的市场公允价，那么你提前付税的钱就存在风险了。关于为什么及何时应做83(b) Election请参见我们另一篇文章，有比较详细的阐述。
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Article edited and drafted by Vincent Cheng (email@example.com).
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