Stock options, typically a critical component of a private company’s ability to attract, incentivize and maintain vital personnel, are becoming increasingly complex in their implementation and potential repercussions. Especially for early-stage companies, gratifying equity packages can be used to compensate for the difference in cash remuneration that a startup can offer compared to the more substantial cash compensations their larger rivals can dish out. This article serves to unpack the complications and nuances involved, particularly in consideration of repricing options, a largely misunderstood aspect of equity compensation.
One key issue that can arise with stock options pertains to exercise prices that exceed the fair market value of the underlying stock. Termed ‘underwater options’, they offer no immediate incentive for employees as the cost to buy the stock is higher than its current market price. Thus, they do not provide the motivational boost that they’re designed to. For private companies, notably those in their early stages, this could be problematic.
The tricky situation compels companies to consider a repricing strategy. Repricing essentially means decreasing the exercise price of previously granted options to a level more in line with the current fair market value of the underlying shares. This could serve to reinstall the intended motivational elements of the stock options by making them ‘in the money’—that is, providing an immediate potential profit.
However, repricing is not a decision to be made lightly. It necessitates a thorough examination of legal and accounting ramifications, shareholder approval requirements under both company bylaws and applicable securities laws, and the potential optics issue it may raise with both employees and potential investors.
Guidance offered by legal experts like WilmerHale can be indispensable during such deliberations. These professionals remain up-to-date with the continually shifting legal landscape surrounding equity compensation, ensuring companies can critically navigate the payment structure’s complexities in compliance with applicable law and the best interest of all stakeholders in mind.