What is a 'Deferred Share'

A deferred share is a share that does not have any rights to the assets of a company undergoing bankruptcy until all common and preferred shareholders are paid. It may also be a share that is issued to company founders that restricts their receipt of dividends until dividends have been distributed to all other classes of shareholder.

BREAKING DOWN 'Deferred Share'

A method of stock payment to directors and executives of a company, deferred shares are deposited into a locked account. The value of these shares fluctuates with the market and cannot be accessed by the beneficiary for the purpose of liquidation until they are no longer employees of the company or a particular date has past and the employee is considered fully vested with the company. Subordinate to all other classes of common and preferred stock, these shares are last in line when a company goes bankrupt and liquidates all assets.

Deferred Shares vs. Phantom Stocks and Restricted Stock

While deferred stock represents a particular cash value based on market conditions, phantom stocks don't allow for payment in cash. Also, rather than actual deposits of securities, companies sometimes maintain bookkeeping entries of cash equaling an offsetting security position. When the executive or director leaves the company, the cash is converted into stocks at market value.

Restricted stocks are those that have specified limits with regard to the ability of the employee to monetize or access the stocks. While both deferred and restricted stocks may be subject to vesting requirements, resulting in a delay before the employee takes full ownership of the associated shares, restricted stocks are immediately converted to unrestricted shares once the period has ended, while deferred shares do not convert until a selected date beyond the vesting date. For either deferred or restricted share, employees who end their employment before the vesting period has ended forfeit all rights to the shares in question.

Use of Deferred Shares

Traditionally, deferred shares are just part of a larger compensation plan. Employees being issued deferred stock may also receive more traditional stock options, which may be subject to certain vesting periods, as well as other investment or retirement options.

No longer commonly used, these shares provided its holders with large dividend payouts, often higher than the average rate offered on other forms of shares, but are only paid after all other classes of shareholders have received their distributions. Holders of deferred shares have access to all the remaining profits after all of the other obligations were met.

RELATED TERMS
  1. Stock Compensation

    A way corporations use stock options to reward employees. Stock ...
  2. Deferred Equity

    A type of security, such as preferred shares or convertible bonds, ...
  3. Deferred Charge

    A prepaid expense that is treated as an asset on a balance sheet ...
  4. Restricted Stock

    Insider holdings that are under some other kind of sales restriction. ...
  5. Deferred Month

    The latter month(s) of an option or futures contract. For example, ...
  6. Deferred Option Month

    The latter month or months of an option or futures contract. ...
Related Articles
  1. Retirement

    Deferred Compensation Plans Vs. 401(k)s

    Discover the major advantages and disadvantages offered by deferred compensation plans for retirement as compared to a 401(k) plan.
  2. Managing Wealth

    Benefits of Deferred Compensation Plans

    Understand the difference between a qualifying or nonqualifying deferred compensation plan. Learn about the benefits of a deferred compensation plan.
  3. Retirement

    How Non-Qualified Deferred Compensation Plans Work

    These tax-advantaged retirement savings plans have their pros and cons, and employers and employees must follow strict guidelines.
  4. Taxes

    How Restricted Stock and RSUs Are Taxed

    This form of executive compensation limits how these stocks can be sold. Find out more here.
  5. Small Business

    How Restricted Stocks and RSUs Are Taxed

    Many firms pay a portion of their employees’ compensation in the form of restricted stock or restricted stock units.
  6. Small Business

    What Does Vesting Mean?

    Vesting is the process of accruing non-forfeitable rights.
  7. Personal Finance

    Introduction To Phantom Stock And SARs

    Phantom stock and stock appreciation rights reward employees with compensation tied to stock performance.
  8. Investing

    What are Preference Shares?

    Preference shares, also referred to as preferred shares, are equity shares that give the shareholders certain rights ahead of common shareholders. For instance, when the corporation declares ...
  9. Investing

    What are Issued Shares?

    Issued shares are the amount of authorized stocks a company’s shareholders buy and own. The annual report shows the number of outstanding shares.
  10. Investing

    What does Deferred Revenue Mean?

    Deferred revenue is advanced payments received by a company for products or services that it has not yet rendered or shipped. Another term for deferred revenue is unearned revenue. Whereas normal ...
RELATED FAQS
  1. What are restricted shares?

    Understand what a restricted share is. Learn why a company would issue restricted shares to employees and why an employee ... Read Answer >>
  2. What are some examples of deferred revenue becoming earned revenue?

    Understand specific examples when a company's deferred revenue is converted to earned revenue, and learn the principles behind ... Read Answer >>
  3. What are the types of share capital?

    Understand the characteristics of common stock and preferred stock, the two ways by which companies obtain share capital ... Read Answer >>
  4. What types of companies tend to have the most deferred revenue?

    Learn what types of companies tend to have the highest levels of deferred revenue. Understand when deferred revenue is recognized ... Read Answer >>
  5. How do restricted stocks, treasury stocks and stock appreciation rights benefit employees?

    Restricted stock represents any equity that is conditionally given or sold to an insider as compensation or as part of an ... Read Answer >>
  6. What are the different types of preference shares?

    Learn about the difference between the four types of preference shares – callable, cumulative, convertible and participatory ... Read Answer >>
Hot Definitions
  1. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  2. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  3. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  4. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
  5. Yuppie

    Yuppie is a slang term denoting the market segment of young urban professionals. A yuppie is often characterized by youth, ...
  6. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
Trading Center