Unregistered, nontransferable shares of a company issued exclusively to corporate affiliates including directors and executives. This particular kind of security is subject to compliance with uniquely applicable U.S. Securities and Exchange Commission trading mandates, and only becomes unrestricted (i.e., available for sale) after the shares have vested. Also commonly known as “letter stock” and “section 1244 stock.” (Although why anyone would call it ‘section 1244 stock’ when they could just say ‘letter stock’ or ‘restricted stock’ is a little baffling. Isn’t life hard enough?)
Restricted stock is structured in such a way that it only vests after certain conditions have been satisfied. These conditions may be financial in nature (the company hits certain earnings per share goals), goal-driven (a specific R&D milestone has been reached) or time-sensitive (an employee must remain with the company for a minimum of five years, etc.) before vesting requirements are satisfied and the shares become unrestricted. If vesting requirements are not met, certain restricted stock options may become subject to forfeiture.
Most often, this particular kind of security is offered to eligible corporate affiliates in the wake of a merger or acquisition. However, certain underwriting activities and affiliate ownership considerations may lead to the issuance of restricted stock.
Executive One: “Did you look over the R&D vesting requirements on your restricted stock benefits?”
Executive Two: “I haven’t gotten around to it yet. Why?”
Executive One: “It says my stock won’t vest until we invent “a practical flying car suitable for the average American family” and “beets that don’t taste weird.”
Executive Two: “I am honestly not sure which task is going to prove more difficult.”