Purchase Price for Restricted Stock?

[Alf]

I am not sure why would a restricted stock plan require a purchase price in general, but need to know why a restricted stock provision would have a 100% of FMV purcahse price for shares of restricted stock. Wouldn't participants be better off just buying shares outright if they are going to pay 100% FMV?

[mbozek]

If the stock is restricted there are conditions on when the stock can be sold, vesting, sale price, etc. which require that the stock be tendered back to the company. The employees can only buy the shares out right if they are sold publicly on a stock exchange or through NASD. Most privately held companies are not listed on an exchange so there is no market to sell the stock other than to the company that issued it.

[Guest Bud]

Alf,

I don't understand how your restricted stock plan works. In most restricted stock plan, the plan issues stock that are awarded to employees. That is, employees get the stock outright, without having to buy it. Buying stock at a set price are stock option plans and stock purchase plans.

If the participants have to pay to receive stock, it sounds like you have a stock option plan. Employees pay 100% of FMV of stock and receive restricted stock. The restrictions will lapse as certain events occur. Usually, those events are years of service in accordance with a vesting schedule.

For example, you have an option to buy restricted stock with a vesting schedule of 20% each year for 5 years. You excercise in year 1 and receive restricted stock in your stock account. After year 1, you are 20% vested in that account. 20% of your stock is no longer restricted stock.

That's my guess.

[Guest svatty]

The 100% of FMV requirement might also be an attempt to satisfy an applicable state security law requirement. For example, in California a broad based employee restricted stock plan for a private company, a security exemption exists that "might" work so long as the consideration paid for such stock equals 100% (or down to 85%) of its FMV. Many firms take the position that the "consideration" is paid with past service to the company and equals 100% / 85% of the stock's FMV.