Restricted Stock Options

Why Restricted Stock Options Give Extra Security To Issuing Companies

Restricted stock options can be a good way for a company to reduce risk still further on an already very safe investment. By offering stock options in your company, you will be able to compete far more effectively with other companies for quality workers. You will be able to do this without the need for any significant sums of up front capital, because the benefit you will pay out is deferred until the stock happens to rise in price. This happens automatically, as no-one in their right mind is going to exercise an option until the real price of stock is higher than the option price.

Although this adds a comforting degree of safety to the offering of stock options, there are still things which can go wrong. Not the least of thee is the possibility that a good employee could stay long enough to pocket the windfall from stock options, and then leave and join a competing business. To avoid this possibility, you need to have some kind of restriction in place.

Restrictions are usually applied in terms of time or of market capitalization. In other words, the stock option only becomes active when an employee has either given a certain length of service to the company, or when the company itself has reached a certain level of profitability. At this point, called the end of the vesting period, all restrictions are lifted and the stock becomes available to buy. This vesting period locks in a certain amount of time for the employer who is making the offer, even if the time period is not exactly defined.

If you are offered restricted stock options, this will usually be at a rate two or three times less than a standard stock option. The reason for this is that actual stock always has some value unless the company has become completely worthless, whereas an option can be valueless if the stock price simply stays below the price at which the option can be exercised. If a company does not perform as well as expected, the options can just expire worthless.

From the point of view of the worker, restricted stock options are sometimes better than those which have no restriction, because they take away some of the inherent risk which is beyond control. However well a company is managed, there are always outside factors which can have an influence on performance, and if there is a global economic downturn a stock can lose value even when the company is performing at full efficiency. With stock options, this downturn can mean a worthless expiry for no gain, whereas the ownership of shares gives the possibility of a recovery in time. You can weather the storm and still profit with restricted stock options.

 

 

 

 

 

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