Are Unvested Shares Considered Outstanding?

Unvested shares are those granted to an individual, often an employee, that are subject to certain conditions, such as continued employment or the achievement of performance goals. Outstanding shares are all of a company’s stock held by investors, which can include corporate insiders and the public. The classification of unvested shares as outstanding is not a simple yes or no; it is determined by the context, shifting between legal, accounting, and tax frameworks.

Status for Corporate Law and Voting Rights

From a legal and corporate governance perspective, the treatment of unvested shares depends on the type of equity award, primarily Restricted Stock Awards (RSAs) and Restricted Stock Units (RSUs). RSAs involve the actual issuance of shares at the time of the grant. These shares are legally issued and outstanding, although held in escrow and subject to forfeiture until vesting.

Because RSA shares are considered outstanding from the grant date, they typically confer voting rights to the recipient immediately. This gives the employee a direct stake and a voice in shareholder matters even before the shares have fully vested.

In contrast, RSUs represent a promise from the company to deliver shares at a future date, once vesting requirements are satisfied. No shares are actually issued at the grant date, so they are not considered legally outstanding. Consequently, holders of unvested RSUs do not have voting rights.

Treatment in Financial Accounting

Financial accounting treats unvested shares differently, which is most evident in the calculation of Earnings Per Share (EPS). For this purpose, financial standards differentiate between Basic EPS and Diluted EPS.

Basic EPS is calculated using the number of shares currently held by all shareholders. Unvested shares, including both RSAs and RSUs that are expected to vest, are generally excluded from this calculation as they are not yet fully in the holders’ control without restriction.

Diluted EPS is designed to show a “worst-case” scenario of what EPS would be if all dilutive securities were converted into common stock. Unvested RSAs and RSUs are included in the Diluted EPS calculation under the treasury stock method. This accounting treatment assumes the shares have been issued, providing investors with a view of how future share issuances could reduce each shareholder’s claim on earnings.

Implications for Taxation

The tax treatment of unvested shares is governed by the Internal Revenue Service (IRS). The main concern is when an employee must recognize the shares as taxable income. The default rule under Internal Revenue Code Section 83 is that unvested shares are not considered transferred for tax purposes until they vest, at which point their fair market value is treated as ordinary income.

An exception to this rule is the Section 83(b) election. This provision allows an employee to choose to be taxed on the value of the restricted stock at the time of the grant, rather than when the shares vest. To make this election, the employee must file with the IRS within 30 days of receiving the grant.

By making a Section 83(b) election, the employee is treating the shares as owned for tax purposes from the grant date. Any subsequent appreciation in the stock’s value is then treated as a capital gain rather than ordinary income, which is often taxed at a lower rate. This can be an advantage if the stock’s value is expected to increase, though it carries the risk that if the shares are forfeited, the tax paid at the grant cannot be recovered.