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  • Ran Bi

Equity Incentive Arrangements Types Intro--01 Restricted Stock

Updated: Sep 4, 2020

Restricted stock a lot of times is also referred to as “founder stock”. It is typically issued to members of the founding team or very-early employees.

Restricted Stock = common stock w/ restrictions

As a type of common stock, Restricted Stock has most of the rights and privileges of issued common stock, including the right to vote and receive dividends (even before fully vested). The "restricted" part generally means the shares can’t be sold and may be forfeited or repurchased by the company until they vest. Shares usually vest on the basis of time (e.g., four years = one-year cliff + three-year vesting) or performance (e.g., the company or employee hits a milestone) or both, in some combination.

Reason to issue Restricted Stock:

  1. Founders use Restricted Stock to ensure that each of the other founders continues to make contributions to the company (otherwise his/her position could be terminated and unvested shares would be repurchased by the company) and to maintain a stable core team together for a certain period of time;

  2. Investors use Restricted Stock to keep the key founders/employees in the company. When investors investing in a startup, they are investing in the core founding team. Investors, especially sophisticated angels and institutional investors, very often condition their investments on the execution of such restrictions on founders' stocks.

**This blog provides general information for educational purposes only. It is not intended to constitute specific legal advice and does not create an attorney-client relationship.

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