In this blog post, you'll find everything you need to know about Restricted Stock Awards (RSA):
Restricted Stock Awards (RSA) is a term coined in Silicon Valley as it is a key part of their venture building playbook. In Norway, this is often referred to as restricted shares or shares with restrictions. For the sake of simplicity, we refer to this as RSA.
RSA is a popular way to incentivize early employees in companies. It means granting company shares that have certain restrictions as the employee still has to earn the right to keep the shares after they are issued. This motivates the employee to stay longer in the company.
RSAs are often used by young companies and are an important part of the compensation structure, allowing cash compensation to be kept at a lower level in the early days when cash is often a scarcity. The employee is compensated and motivated by a potentially significant gain if the share price rises over time.
RSA can thus be compared to an investment in the company, where the recipient is an employee who was given the opportunity to buy shares at a favorable price. However, the employees must return the unvested shares if they leave early or have not met the criteria to keep the shares. This helps to protect the company and prevent it from ending up with what is often called "dead equity" and a "broken" shareholder book (cap table) that can cause frustration and make it difficult to raise external capital.
When an employee is granted (offered) a Restricted Stock Award, the employee must decide whether to accept or decline the grant
The shares can, in principle, be given for free, meaning priced in most cases. Since this instrument is most often used in the early days of a company, the price can be very favorable. Even after taking external investments if this is done with a convertible structure. This will be covered in more detail in another blog post
After accepting a grant and making payment (if applicable), the employee must wait until the grant has vested before the restrictions are lifted. The time during which the shares are subject to restrictions is often referred to as the vesting period.
There are two main types of vesting; time-based vesting or milestone-based vesting. The most common type of vesting in early stage companies is time-based vesting. If the employee leaves the company before the vesting period expires, the company has the right to buy back the unvested shares at the same price as the employee bought the shares for. It is also normal for the shares to vest gradually during the vesting period.
Let's illustrate this with an example: If an employee is granted RSAs with a vesting period of 4 years with gradual vesting every quarter, the employee must work 4 years to become entitled to keep all the shares. If the employee should leave the company after one year, he/she has earned the right to keep the vested shares (1/4 of the granted shares). The graph below also shows that the plan has a threshold (cliff) of 12 months where nothing is earned until after this time.
Restricted Stock Awards (RSA) should not be confused with Restricted Stock Units (RSU). The difference is that RSUs are a promise to receive shares in the future (after vesting) at no cost. Special tax considerations apply in this case. You can read more about Restricted Stock Units in this blog post.
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