Employers use myriad benefit schemes to entice and retain employees. Among these exist those schemes involving stock, such as stock options and restricted stock. Restricted stock and stock options differ fundamentally from one another, though both may lapse in one of two ways. Understanding stock lapse requires an understanding of how these benefit schemes work and the two ways in which this may happen.
Restricted stock essentially constitutes a type of bonus. When an employer offers you a restricted stock grant, they promise to give you a certain number of shares at a pre-determined point in the future, or to give you a bonus equal to the value of a certain number of shares. For instance, your employee may promise to give you 100 shares of stock in five years time, or the value of 100 shares of stock in five years. When five years transpire, your grant vests and you receive the shares or value of shares without restriction.
Stock options constitute employee benefit plans with which an employer reserves a certain number of stocks for an employee to purchase during a pre-determined period. For instance, an employer may reserve 100 shares of company stock for you, which you can access after five years of service. When five years transpire, your options vest, and you may exercise, or purchase them. Stock options eventually expire, meaning you must exercise them before they expire. Unlike restricted stock, employees must purchase stock options – these shares do not constitute bonuses or gifts.
Lapsed stock constitutes a form of stock options. When an employee grants a stock option, it reserves a certain number of shares in the employee options pool for you. If you fail to exercise these options before they expire, the options lapse and return to the company. Any shares not optioned constitute lapses stock. For instance, if you receive an option to purchase 1000 shares and only exercise 300 of them before expiration, 700 of those shares lapse. Restricted stocks cannot lapse in this manner because you receive all of them.
The term lapse often appears in relation to restricted stock and stock options as a synonym for vesting. Vesting occurs when all restrictions on a stock vanish. For instance, when the shares reserved for you by a restricted stock grant transfer to your possession, this process constitutes vesting. Vesting constitutes the point at which all restrictions on a stock lapse. Thus, lapsed stock may refer to restricted shares or option shares that vested.
- “Schaum’s Outline of Intermediate Accounting II Second Edition”; Baruch Englard; 2007
- Fidelity Investments: About Restricted Stock Awards
- The National Center for Employee Ownership: Employer Stock Plans
- “Stock Options for Dummies”; Alan R Simon; 2001
- “Family Lawyer’s Guide to Stock Options”; Lester Barenbaum; 2007
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