Stock options are a critical tool for attracting and retaining top talent in today’s competitive business environment. They provide employees with the opportunity to participate in the growth of the company and share in its success.
However, when the stock price has declined since the option was granted, the exercise price of the option may be higher than the current fair value of the common stock. This makes the stock option less valuable which may lead to decreased employee morale and retention.
In these situations, repricing your stock option grants can be a way to retain and incentivize employees by providing them with an option to purchase company stock at a lower strike price, re-establishing their upside.
However, the process of repricing your stock option grants is a complex decision that requires careful consideration of both the potential benefits and risks.
To guide you through this decision, consider the following key areas:
5 Repricing Stock Options Considerations
1. Accounting implications
Repricing stock options can have significant implications for your financial statements, including potential charges to earnings and changes to key financial metrics such as earnings per share (EPS).
To ensure that the accounting treatment of the modification is accurate and compliant with accounting standards, it’s important to engage a qualified valuation expert.
2. Regulatory requirements
Resetting stock option strike prices can have implications for regulatory compliance, including compliance with the Internal Revenue Service’s safe harbor rules under IRC 409A as well as SEC rules.
To remain compliant with these various regulatory requirements, engaging a qualified valuation expert to perform a 409A valuation is necessary.
3. Employee perceptions
Reevaluating stock options can have implications for employee morale and perceptions of the company. As you consider a repricing, think about how employees may perceive the change and whether it may have unintended consequences, such as decreased employee motivation or decreased retention.
4. Shareholder perceptions
Modifying stock options can also affect shareholder perceptions of the company. When contemplating a repricing, consider how shareholders may perceive the change and whether it may impact their future investment decisions.
5. Legal considerations
Repricing stock options can have potential legal implications, including potential violations of the terms of an option agreement or breaches of fiduciary duty. To ensure that the repricing is compliant with legal requirements, it’s crucial to engage legal counsel.
Keep in mind that repricing your stock options will likely require a new valuation for 409A compliance purposes. A 409A valuation is required by the IRS to ensure that stock options are issued at fair market value and can have implications for both companies and employees.
The timeline for completing a 409A valuation can vary depending on the complexity of your business and the scope of the valuation. However, the process typically takes a few weeks to complete, from the initial data gathering phase to the completion of the written report.
Most commonly, companies will need a 409A every 12 months if they are granting options regularly, and more frequently based on significant events such as a cash raise, a restructuring, or based on marketplace and macroeconomic shifts.
In conclusion, stock option modification and exchange programs can be an effective strategy to counteract motivational and retentive concerns that may arise from underwater options affected by market conditions or specific company performance.
As outlined above, the creation, implementation, and administration of these programs introduces a multitude of legal, regulatory, tax, employee, and shareholder relations issues that companies must consider.
Boards and management teams should consult with their legal, tax, and accounting advisors before embarking on an option exchange, in any form.
If you need assistance with this process, please reach out to our team to discuss your current situation and all potential pathways available to you.
Are you looking to grant options or need a refresh of your 409A?
Our team of appraisers can assist you in this process through a consultative approach, contrasting the typical template based approach found in the market currently.
Please reach out to Chris Dougherty, Channing Hamlet, or Jordi Pujol to inquire about our appraisals and how we differentiate ourselves through our engagement and tailored service.
We are committed to help you navigate the complexities of stock option repricing and ensure that you make informed decisions that align with your company’s goals and objectives.
About the Authors
This news release is for informational purposes only and does not constitute an offer, invitation or recommendation to buy, sell, subscribe for or issue any securities. While the information provided herein is believed to be accurate and reliable, Objective Capital Partners and BA Securities, LLC make no representations or warranties, expressed or implied, as to the accuracy or completeness of such information. All information contained herein is preliminary, limited and subject to completion, correction or amendment. It should not be construed as investment, legal, or tax advice and may not be reproduced or distributed to any person. Securities and investment banking services are offered through BA Securities, LLC Member FINRA, SIPC. Principals of Objective Capital are Registered Representatives of BA Securities. Objective Capital Partners and BA Securities are separate and unaffiliated entities.