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Restricted Stock Awards (RSA) is a popular way to incentivise early employees in companies. It means grant of company stock, which are restricted as the employee still have to earn the right to keep the shares after they are issued. This incentivise the employee to stay with the company longer
RSA are often used by young companies and is an important part of the compensation structure, so that cash compensation can be kept to a minimum in the early days when cash is scarce. The employee is hence compensated and motivated by a potential significant gain on share price over time.
So, in other words, RSA can be compared with an investment in the company, where the receiver is an employee which was given the opportunity to buy shares at a favourable price. However, the employees have to return the unvested shares if they leave early without providing the anticipated value . This serves to protect the company and prevent ending up with what is often called “dead equity” and a “broken cap table” which can cause frustration and make it hard to raise outside capital.
Once an employee is granted (offered) a Restricted Stock Award, the employee must decide whether to accept or decline the grant
The grant may be given free of charge, but are in most cases purchased. Since this instrument is most often used in the early days of a company, the price can be very favourable. Even after taking outside investments if this is done with a convertible note. More on this in another blog post
After accepting a grant and providing payment (if applicable) the employee must wait until the grant vests before the restrictions are lifted. The restriction period is often called vesting period.
There are two main types of vesting; time-based vesting or performance / conditional based vesting. The most common type of vesting in early stage companies are time-based vesting. If the employee were to leave the company before the vesting period expires, the company has the right to buy back the unvested shares for the same price the employee purchased the shares for. It is also normal that the shares vest gradually during the vesting period.
Let´s illustrate this with an example: If an employee is granted RSA with a vesting period of 4 years with gradual vesting every quarter, the employee have to work 4 years to earn the right to keep all the shares. If the employee were to leave the company after one year, he/she has earned the right to keep the vested shares (1/4 of the granted shares).
Restricted Stock Awards (RSA) should not be confused with Restricted Stock Units (RSU). The difference is that RSU is a promise to receive stock in the future (after vesting) at no cost. Special tax considerations apply in that case, which we will cover more in future blog posts.
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