Repricing “Underwater” Stock Options

These types of problems, in turn, lead to legal battles and possible difficulties down the road for both the original homeowner and the third party lender. With an ESPP, the market price at the beginning of an offering does not Why shouldn't I exercise them? What are underwater stock options? This depends on the provisions in your stock plan and the structure of the merger or acquisition.

What is 'Underwater' Underwater is the term for a financial contract or asset that is worth less than its notional value. This item could be an out-of-the-money call option where the stock currently trades above the option's strike price. Underwater is also a term for a home, or other substantial asset, which has an outstanding mortgage or loan with a higher amount due than the value of the asset could bring in the .

What is 'Underwater'

However, it should avoid tax pitfalls for you and the company, such as What impact can a stock option exchange have on employees who are tax residents outside the US? While stock option exchanges usually do not create tax consequences for participants who are US tax residents, employees who are tax residents of other countries may be taxed when If my company offers me options in exchange for underwater options, or reprices them, will there be any tax impact on me?

Very few companies arrange a straight repricing of outstanding options. Companies concerned about widespread and deeply underwater options may offer My company will let me exchange my underwater options for restricted stock. What is the tax impact? The standard option-for-option exchange is not taxable. When you exchange underwater options for restricted stock, the value of the shares I have both in-the-money and underwater options.

If I exercise them all and immediately sell the stock, can I offset the gains with the losses on the underwater options?

This is wishful thinking, because these are two separate transactions. It does not make sense to Can my ESPP go underwater or be affected in other ways by volatile stock prices?

Employee stock purchase plans cannot be "underwater" in the traditional sense of having a purchase price greater than the current stock price. With an ESPP, the market price at the beginning of an offering does not Can restricted stock and performance shares go underwater? Not in the way stock options can. Restricted stock is worth the full market value of the stock when it vests or, with restricted stock units, when shares are delivered.

It does not matter if Can the exercise price of outstanding stock options ever be raised or lowered? Can the options be repriced? Generally, the exercise price cannot be raised without your written consent If my company or a third party buys my employee stock options for cash, how is this taxed?

You recognize ordinary income for the full value of the cash payment. Any deferred portion of the cash sale proceeds is not taxable until In an acquisition, what happens to my underwater stock options? This depends on the provisions in your stock plan and the structure of the merger or acquisition. According to the flexibility for adjusting outstanding grants that your company's stock plan provides, the buyer can This depends on whether the ISOs are already vested.

What tax treatment applies if I exercise vested pre-IPO options that now cost more to exercise than they are worth? In a public company you would never exercise underwater stock options.

In a private company In a divorce case, how do you argue that underwater stock options have value? When the net intrinsic value of the stock is zero, the attorney for the nonemployee-spouse has two ways to obtain At death, the value of options is included in the gross estate for estate tax purposes. But what happens if the stock's value drops below the exercise price and the options expire unexercised?

When options are exercised, generally the estate or beneficiary is able to take an income tax deduction for the amount of estate taxes already paid by the estate. But when they are not exercised you cannot take the deduction against other income The accounting implications are typically the most troublesome aspect of repricing 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 accounting 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 with 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 and 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.

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.

BREAKING DOWN 'Underwater'

An options exchange is an alternative to repricing underwater stock options. Most companies set an exchange ratio of underwater options for new ones at the current market price so that the total value of the new options is equal to that of the previous options. Betting on a big price stock binární opce cheap out of the money options can be profitable, but understand the risks and alternatives before doing options. If you are underwater on your mortgage, this program underwater be stock what you need to underwater build with equity in your home. What to do with Underwater Stock Options BY MARK POERIO AND SEAN HONEYWILL As a result of the stock market’s plummet in , the executives of many public and private companies now hold stock options that have little retention or incentive value because their exercise price far exceeds the.