What Does Restricted Stock Mean?Restricted stock is typically issued to a seller as part of the consideration for a transaction. It is restricted to ensure the seller meets certain post-transaction requirements imposed by the buyer. Restricted stock can be cancelled or purchased back by the buyer at the original cost if the contingent requirements are not met.
Post-transaction requirements may include:
- Meeting future profitability targets in which case the restricted stock has been issued as a form of earnout prepayment;
- Ensuring the management team from the seller stays on for a specified time period. If any of the key managers leave, the stock they received may be cancelled; and
- Ensuring that the management team from the seller abides by any non-competition agreements in place. The restricted stock serves as a form of soft enforcer of the non-compete.