2.Hedging/borrowingconstraints.Employeeswithrestricted
stock mayvery wellbe able toavoid thebiggestcosts of
illiquidity iftheycanhedgeagainstpricemovements (thus
enablingthemtolockinhighstockpricesontherestricted
stock)andborrowagainsttheestimatedmarketvalueofthe
restrictedstock.Astheconstraintsonhedgingandborrowing
becometighter,theilliquiditydiscountattachedtorestricted
stock should increase.
- Stock volatility. The cost of illiquidity becomes much
largerwhentherestrictedstockisinavolatilecompany,since
thestock pricecanswingwildlyfromperiodtoperiodand
employees can do little to protect themselves or cash out.
Theestimationoftheilliquiditydiscountonrestrictedstockis
fartoodetailedforthischapter,butChapter 16 doesdealwith
this issue.
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Thethirdmodification ofrestrictedstock isa performance
contingency.Iftheemployeewillreceivethestockonlyifa
performance condition is met (whether that condition be
stated in terms of revenues or earnings),the value of the
restricted stock will have to reflect the likelihood of this
happening.
Incorporating Restricted Stock into Valuations
Incorporatingrestrictedstockintovaluationsisfareasierthan
incorporating employee options, which should be an
argument in favor of the use of restricted stock. In this
section, we consider howbest to consider restrictedstock
issues in both discounted cash flow and relative valuation.