Restricted Stock Agreements

Why would an individual desire or require a restricted stock agreement? A “Restricted Stock Agreement” places a limit on a stockholder’s ability to sell stock on the open market. 0Imagine a company is worth $20 million and the company wants to issue new employee a 1% stock interest in the company. That 1% would be worth $200,000; however, the employee is not expected to write a check to the company for those stocks. Although the IRS views this grant as income, it is unlikely that the employee would be able to afford the tax liability associated with it. At this point, the stock is not liquid and can’t be sold for immediate value.

Consequently, a restricted stock purchase agreement is often created for a new employee or owners of a startup, and is a written agreement that places restrictions on the stockholders rights, with respect to the shares being issued. These agreements represent actual ownership within a company, as the stock grants you all of the same rights, privileges and responsibilities as any other owner of the same class of shares. This typically includes the right to dividend distributions (should the company issue dividends) and the right to vote at the annual meeting. In other words, as an owner of restricted stock, you likely have the same ownership rights as the founders of the company and considered “restricted” because it may be subject to certain restrictions and vesting provisions, such as the company’s right to repurchase certain unvested shares in the event the employee ceases working for the company.

At Porter Law Group, we understand that stock options and restricted stock award plans may be a significant percentage of your overall earnings that need to be protected. Our attorneys will strategically design agreements or litigate aggressively, presenting a compelling case for remedies that provide maximum recovery of your stock option value.