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Biotech / Medical : Biotech Valuation -- Ignore unavailable to you. Want to Upgrade?

To: Vector1 who wrote (6849)	7/31/2002 11:33:07 PM
From: Biomaven	Read Replies (2) \| Respond to of 52153

<<Restricted Stock>> lecture mode on <g> First let me address some terminological ambiguity for those not familiar with this area. Unfortunately the same term is used for two different (and overlapping) purposes. There's "Restricted Stock" in the securities law sense - that's simply stock that is not freely tradeable, generally because it's owned by insiders or hasn't been registered under the securities act. (Typically Restricted Stock is sold on the open market pursuant to Rule 144). Then there's the Restricted Stock you refer to - that's stock awarded to employees where the company has the right, lapsing over time, to repurchase the shares, typically at the same price the employee originally paid for the shares. That's the sense in which I'll be using it here. The key with Restricted Stock is what price it's awarded at. For most companies it's a giveaway - the employee has to pay little or nothing to get the stock. The employee doesn't really own the stock until it vests (but often get to vote the stock and receive dividend payments to boot). The employee has to pay ordinary (non-CG) income taxes on the spread at each vesting event, and the company has to take a comp. expense (amortized over the vesting schedule) for the bargain element - the spread between what the employee paid and the fair market value (FMV) at award. Because of the comp. expense and the giveaway nature of this "cheap" Restricted Stock, it is generally awarded only to a few high level executives rather than to the general employee base. My personal view of this type of award is that it's even more of a giveaway than options. It's particularly egregious in dividend-paying companies where the executive gets fat dividends even before the stock has vested. Restricted Stock where the award price is some decent fraction of FMV is much more interesting - here the employee is much more like a true shareholder. The problem here is that the employee actually has to come up with some up-front money. This generally makes it unusable for other than high-level executives except if the company arranges for some sort of loan. I do know of one company that used to (and may still do) give most employees the choice between options or fewer shares in Restricted Stock with an award price of half FMV, with a recourse loan provided by a third party. The election you referred to to make gain LTCG only really works for early-stage private companies where the employee is happy to buy the stock at (or very near) the FMV because the FMV is so low. When you make the election (called an 83(b) election) you get to pay tax immediately on the bargain element of the award. In an early stage private company this is fine - you buy at or near FMV, make the election and pay little or no tax, but then get LTCG treatment going forward. This election virtually never makes sense in the public company context because you would normally have a big tax bill immediately, even though you may never actually get the stock (because you leave before it vests). Bottom line to my mind is that Restricted Stock as it is generally used in most public companies is no better than options from a cost-benefit employee retention perspective, generally worse (for the company) from an accounting perspective and worse (or at least no better) from an employee tax perspective. The policy I like best is to make continuing option grants for high level executives contingent on the number of shares (or vested in-the-money options) they have retained. Peter