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Restricted stock always has some value to you even when the stock price drops below the price on grant date. This may help you feel more of the wealth impact (and shareholder pain) of rises and falls in your stock price.
Because restricted stock has full value at vesting, companies grant fewer shares of restricted stock than stock options (see the FAQ on the ratios of restricted stock and stock options). Although "underwater" options (market price lower than exercise price) have little practical value to you, options give you more leverage in a rising market than restricted stock does. On the other hand, if your company pays dividends, an advantage in restricted stock is that it may pay them on your restricted shares. (See a related FAQ on how you can calculate which is better in your situation.)
Interestingly, restricted stock (along with restricted stock units) has gained popularity among companies and investors, despite being long bemoaned as "free stock." Because restricted stock has value even when the stock price falls, investors have tended to be very critical of its use. In reaction to this criticism, particularly of time-vested restricted stock for senior executives, companies are adding performance features.
The type of grants you receive can also depend on your company's industry and stage of development, and your position in the company (see an FAQ with survey data). Early-stage companies primarily rely on stock options. When they reach medium size, they may add performance or restricted shares to the grant mixture. Mature companies may use a portfolio approach that combines stock options, performance shares, and time-based restricted stock, particularly for senior managers. Adding restricted stock to the grant mixture can help you ride out stock-price volatility that would otherwise cause stock options to go underwater.
To compare the taxation of various types of stock grants, see another FAQ. |
