Restricted Stock

Restricted stock is an outright grant of common stock subject to vesting and company repurchase rights for unvested shares. Used primarily for founders and very early employees in C-corp startups, the recipient owns the shares from grant date, can file an 83(b) election to lock in tax treatment at the near-zero grant-date value, and starts the long-term capital-gains holding clock immediately. It is structurally different from stock options (which are rights-to-buy, not ownership) and from RSUs (which are promises to deliver shares in the future).

The mechanic of a restricted stock award:

• Grant: the company issues actual shares of common stock to the recipient, subject to vesting (typically 4 years with a 1-year cliff for early employees, or various structures for founders).
• Purchase: the recipient typically pays a nominal price (often the fair market value per the 409A, which is very low at company formation) to receive the shares.
• 83(b) election: the recipient files Form 83(b) with the IRS within 30 days of grant, electing to recognize income (essentially zero at founding) immediately rather than as vesting occurs. This locks in the holding period for long-term capital gains starting at grant date and avoids ordinary income tax on vesting appreciation.
• Vesting: unvested shares are subject to company repurchase at the original purchase price if the recipient departs; vested shares are unrestricted.
• Capital gains treatment: if held for more than one year from grant (with 83(b) filed) and the sale is more than two years after grant, qualifying QSBS treatment may apply (potential 100% federal capital gains exclusion under Section 1202).

Why founders take restricted stock instead of options: at incorporation, the fair market value of common stock is essentially zero, so the founder can be granted a large amount of restricted stock for a nominal price, file 83(b), and start the QSBS / long-term capital-gains clock immediately. By contrast, options at the same valuation would have a zero strike price but require active exercise and subsequent holding to capture the same tax treatment. Why options replace restricted stock at later stages: as the company's 409A valuation climbs, restricted stock grants become impractical because the recipient would owe income tax on the spread between grant value and what they paid. Options solve this because the strike price equals fair market value at grant (no immediate income recognition).

What founders get wrong: Missing the 30-day 83(b) filing window. The election must be filed with the IRS within 30 days of grant; there is no retroactive remedy. Founders who miss the deadline owe ordinary income tax on the spread between purchase price and fair market value at each vesting event, which can grow into massive tax liability as the 409A climbs. The right discipline: file 83(b) immediately on incorporation, send by certified mail with return receipt, keep copies in company and personal records, and ensure all co-founders do the same. The cost of doing it right is a stamp and a form; the cost of doing it wrong can be life-changing.

Related: Common Stock · Stock Option · 83(b) Election · Vesting · Founders Stock

FAQ

What is restricted stock?
An outright grant of common stock (not options) subject to vesting and company repurchase rights for unvested shares. Used primarily for founders and very early employees in C-corp startups because the recipient owns the shares from grant date and can file an 83(b) election at near-zero value.

How is restricted stock different from stock options?
Restricted stock is actual ownership of shares from grant date (subject to forfeiture if unvested); options are the right to purchase shares at a strike price in the future. Restricted stock starts the long-term capital gains clock immediately (with 83(b) filed); options only start it after exercise.

Why do founders use restricted stock instead of options?
Because at incorporation, the 409A value of common is essentially zero, so the founder can be granted a large amount of restricted stock for nominal cost, file 83(b), and start the QSBS five-year clock and capital-gains holding period immediately. At later stages, restricted stock becomes impractical because the recipient would owe income tax on the spread; options solve this by having strike = fair market value at grant.