Understanding Restricted Stock Grants and Units

Over the past decade, restricted stock awards have become more common, yet many executives still find themselves confused about how these forms of compensation work. So, what exactly is a restricted stock grant?

Restricted stock grants (RSGs) are awards of company stock that are given to employees, often as part of a broader compensation package. Unlike stock options or employee stock purchase plans (ESPPs), RSGs come with specific rules for vesting and taxation. A similar but distinct instrument is the restricted stock unit (RSU), which represents a promise to deliver shares (or cash) in the future, typically without voting rights or guaranteed dividends.

A typical restricted stock grant includes:

• Grant Date – the official date you receive the award.

• Grant Value – usually based on the market price but often carries a $0 cost basis for the employee.

• Vesting Schedule – determines when the shares officially become yours and are available to sell.

There are several types of vesting schedules:

• Graded Vesting: Shares vest gradually over time (e.g., 25% per year over four years).

• Cliff Vesting: 100% of the shares vest after a specific time period, common for performance-based awards.

• Hybrid Vesting: Shares vest in varying intervals or may be triggered by a liquidity event like an IPO or acquisition.

While RSUs function similarly to RSGs, they differ in keyways: they are unsecured, often lack voting rights and dividend participation, and don’t allow for 83(b) elections, making them simpler for companies but potentially less flexible for employees.

Example:

You receive a restricted stock grant for 10,000 shares on a 4-year vesting schedule with 25% of the shares vesting each year.

This is what’s known as a graded vesting schedule; your shares become available in equal installments over the specified time frame, typically three to five years. Alternatively, graded vesting schedules can also vest over varying intervals.

Vesting schedules can also have “cliffs.” This is when your shares vest completely over a stated period. This type of schedule is most common for performance-based goals or company performance.

Restricted stock units work very similarly but are not secured by cash or shares anywhere in the company. They are only a promise to pay, and can be fulfilled with cash or stock, although most companies choose stock. Because they are unsecured, they do not come with voting rights. They typically do not come with dividend payments either. However, companies can elect to provide dividend equivalents. These types of grants also have fewer options for how they are divested and treated for taxes.

Newly public companies, or companies that are purchased, have a slightly different approach to vesting. A liquidity event, like the IPO, a sale, or a merger may need to occur before shares vest. After such an event occurs the shares will vest 180 days later.

Employer vs. Employee: Who Really Benefits?

From the employer’s perspective, stock grants are primarily a strategic tool—not a benevolent gesture. They offer a cash-free method to compensate key employees, incentivize retention through vesting, and align employee goals with company performance. Some companies also use RSUs to time their compensation expense for tax purposes, taking advantage of potential stock growth to increase deductions.

For employees, restricted stock can be attractive because:

• It always has value—even if the stock price falls.

• It’s less complex than stock options, which require a strike price to be exceeded before gaining value.

• It may come with dividend equivalents and voting rights (for RSGs, not RSUs).

However, there are risks:

• Unvested stock is forfeited if the employee leaves or is terminated.

• Overconcentration in company stock can increase financial risk.

• Shares are non-transferable while unvested and cannot be gifted or used as collateral.

Employees should also ensure stock awards are addressed in estate plans, including naming beneficiaries and understanding how vesting is treated in case of death or disability.

Tax Planning and Key Considerations

Restricted stock awards involve nuanced tax planning. Generally, taxes are owed in two phases:

1. At Vesting – The value of the shares at the time of vesting is taxed as ordinary income (including FICA and Medicare).

2. At Sale – Any increase in stock value after vesting is taxed as capital gains (short or long term, depending on holding period).

Example: If 2,500 shares vest at $25 per share, you would owe income tax on $62,500 in that year. Many companies allow automatic share sales to cover this tax obligation.

You can also elect an 83(b), which allows you to pay taxes at the time of the grant rather than at vesting. This is beneficial if you expect the stock to appreciate significantly. But it carries risk: if the stock never vests or drops in value, you may pay taxes on income you never realize.

Case Study: Two employees receive the same grant. One files an 83(b) and pays taxes upfront at a lower stock value, potentially benefiting from long-term gains if the stock rises. The other waits until vesting and pays more in tax at that time. The first employee stands to net more—unless they leave the company early and forfeit unvested shares.

Additional Considerations:

• Executives may be subject to company stock ownership guidelines.

• SEC reporting obligations apply under Section 16 (Forms 3, 4, 5).

• Proxy disclosures are required under SEC rules adopted in 2006.

Next Steps
Restricted stock compensation is complex and requires collaboration between your financial planner, tax advisor, and estate attorney. Be proactive in understanding your grants and seek out professionals with experience in executive compensation to maximize their benefit and minimize risks.

Thaddeus Schlaud is a Certified Financial Planner® and Director of Client Service at Gainplan LLC. He specializes in executive benefits and compensation.

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