Repricing share options

Traditionally repricing simply involved canceling the existing stock options and granting new stock options with a price equal to the current fair market value of the underlying stock; but over the years alternative approaches to traditional repricing have been developed to avoid the unfavorable accounting treatment now associated with a simple repricing.

We advise our clients that repricing is not a straightforward process and that they should carefully consider the following three aspects associated with a repricing — corporate governance, tax and accounting aspects.

The decision of whether to undertake a stock option repricing is a matter of corporate governance for the board of directors to consider and approve. The company should be attentive to the obvious shareholder concern that management and employees who may bear some obvious responsibility for the very problem being addressed are in some way being made whole, unlike the shareholders who are left to hold their underwater stock.

Other issues that should be considered include the terms of the new option grants, including the number of replacement shares and whether to continue the current vesting schedule or introduce a new vesting schedule for the repriced options. In order to preserve the favorable ISO tax treatment that is permitted under that section of the Code, the new stock options must be granted at the current fair market value of the underlying stock.

Assessing the current fair market value of a privately held company will require the board to set a new value portugal masters prize money 2016 the common stock of the company. The accounting implications are typically the most troublesome aspect of repricing stock options.

Repricing “Underwater” Stock Options

Over the past year several of our clients have considered repricing their underwater stock options and we have participated in at least three repricing approaches that seek to avoid the repricing share options concerns described in the prior section. This is put into place by canceling the underwater stock option and then offering the employee the grant of a replacement option, six months and one day later, with an exercise price equal to the then fair market value of the underlying stock, whatever that may be at the time.

Under this approach, a company cancels the underwater stock options and replaces them repricing share options an outright restricted stock award.

Under this approach a company grants additional stock options at the lower stock price on top of the old underwater options without canceling the old underwater options. Each of these approaches should avoid variable accounting treatment.

However, each of these approaches is not without its own separate concerns and should be reviewed in light of the facts and circumstances of the particular situation. For example, when considering a six panda day trading course one day exchange, there is risk to the employee that the fair market value will rise as of the reissuance date; or when considering a restricted stock award a company should consider whether the employees will have the cash available to pay for the stock at the time of award.

Stock Option Repricing: Employees Benefit But What about Investors? - Knowledge@Wharton

Additionally, when considering a make up grant, a company should consider the potential unwarranted dilution to existing shareholders. Repricing of stock options should not be lightly undertaken.

A company considering repricing its stock options should consult with its legal and accounting advisors to consider all of the implications, since a repricing implicates several sometimes conflicting sets of rules. That being, said repricing often remains a necessary undertaking given the critical importance of retaining and incentivizing employees.

You can use these tags: Corporate Governance Considerations The decision of whether to undertake a stock option repricing is a matter of corporate governance for the board of directors to consider and approve.

Accounting Considerations The accounting implications are typically the most troublesome aspect of repricing stock options. Alternative Repricing Approaches Over the past year several of our clients have considered repricing their underwater stock options and we have participated in at least three repricing approaches that seek to avoid the accounting concerns described in the prior section.

Conclusion Repricing of stock options should not be lightly undertaken. Leave Comments Click here to cancel reply.