The compensatory award of company stock granted to a service provider that is subject to certain restrictions until it vests.

On the grant date, the service provider becomes the record owner of the restricted stock and has voting, dividend, and other stockholder rights. However, the shares are non-transferable and subject to forfeiture until the restricted stock vests (meaning, until the restrictions lapse). The period during which restricted stock is unvested and subject to restrictions is often referred to as the restricted period.

The shares are fully issued at the time of the grant and provide immediate value to the grantee. There is no exercise feature and therefore the awards have no risk of going "underwater." Unlike stock options, restricted stock continues to have value even if the stock price declines.

The value of restricted stock is generally not taxable as compensation to a service provider until the restricted stock vests. However, a service provider may make an election under Internal Revenue Code Section 83(b) to be taxed on the grant date on the excess of the fair market value of the restricted stock at the time of grant over the amount, if any, paid for the restricted stock. This is generally a tax-advantaged election for the holder, although not without risk. If the service provider later forfeits the shares, he is not entitled to a refund for the taxes paid. For a sample Section 83(b) election form, see Standard Document, Code Section 83(b) Election: Restricted Stock.

Most restricted stock awards are granted under a restricted stock plan or an omnibus equity incentive plan. For a sample restricted stock award agreement, see Standard Document, Restricted Stock Award Agreement (Employees).