MPI is often engaged to value shares of restricted stock issued to employees, directors or other insiders of publicly held companies. Restricted stock typically refers to the stock of a publicly held company that is not salable or transferable by the holder of that stock until certain restrictions lapse. Restrictions typically involve the passing of time or a vesting schedule, but can also encompass certain performance conditions or company-specific financial targets. Restricted stock is a commonly used component of employee compensation to key executives. It is being issued more frequently in lieu of stock options, which seem to be falling out of favor in recent years.
Restricted stock often sells at a discount to the market price of the unrestricted counterpart security that is publicly traded. This discount stems from the restrictions on the stock and the associated illiquidity. In valuing restricted stock for tax purposes, the best valuation approach is to examine privately negotiated transactions of restricted stocks for which sufficient information is available.
MPI has studied the pricing of restricted stocks vis-à-vis their publicly traded counterparts for many years. We have published studies on restricted stocks and are currently embarking on a new study of restricted stock data covering the period from 1999 to the present. While these studies are ideal for the valuation of restricted stock, they are also very useful in developing lack of marketability discounts in a wide variety of valuation engagements. We are proud of our work through the years involving restricted stocks and continue to believe that restricted stock data provides the best starting point for developing a lack of marketability discount for private business interests.
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