If you have repriced stock options – generally you should consider yourself lucky. Stock options are a common incentive provided by employers to attract and retain talent. These options give employees the right to purchase company stock at a set price, typically referred to as the “strike price,” after a specified period. However, market conditions can fluctuate, causing the underlying stock price to drop significantly below the strike price. In such cases, companies may choose to reprice stock options to maintain their attractiveness and motivational value for employees. Here’s what you need to know and do if your company decides to reprice stock options.
Understanding Repricing
Repricing occurs when a company adjusts the strike price of existing stock options to a lower level, aligning it with the current market price of the stock. This can be a positive development for employees, as it restores the potential for future gains from the options.
When Stock Options Are Repriced Lower
If the price of your stock options is repriced lower than the original purchase price, you should generally be pleased. This adjustment means that your options are no longer “underwater,” and they now have a higher likelihood of being profitable if the company’s stock price appreciates in the future.
For example, if you were granted stock options with a strike price of $50, but the company’s stock has fallen to $30, repricing the options to $30 provides a more realistic incentive. It aligns the option price with current market conditions, thereby reinstating the potential financial benefit for employees.
When Stock Options Are Repriced Higher
While less common, there may be instances where a company reprices stock options to a higher level. If this happens, you need to carefully review the original option agreement you signed. Some employers include clauses that allow them to adjust the future purchase price based on predefined terms or specific circumstances.
If your options are repriced higher, ensure that the company is legally and contractually allowed to do so. This information should be detailed in the terms and conditions of your original stock option grant. If you find any discrepancies or have concerns, consider seeking advice from a legal professional or a Fee-Only financial adviser.
Clauses Affecting Departing Employees
Many companies include clauses in their stock option agreements that impact departing employees. For instance, if you leave the company and join a competitor, you may be required to forfeit your options or repay some of the profits earned from them. This is often done to protect the company’s interests and maintain a competitive edge.
It is crucial to understand these clauses before making any employment decisions. If you plan to leave the company, review the stock option agreement to determine if you will be affected by such clauses. Knowing this information beforehand can help you make more informed career choices and financial plans.
Steps to Take
- Review Your Option Agreement: Carefully read the terms of your stock option agreement to understand the conditions under which repricing can occur and any clauses affecting departing employees.
- Consult a Professional: If your options are repriced, either higher or lower, and you have concerns or questions, consult with a legal professional or a Fee-Only financial adviser. They can provide personalized guidance based on your specific situation.
- Monitor Company Communications: Stay informed about any changes to your stock options by keeping an eye on company communications, such as emails, internal memos, or announcements during company meetings.
- Evaluate Your Financial Goals: Consider how the repricing of stock options aligns with your overall financial goals and retirement plans. Adjust your investment strategy as needed to ensure you are on track to meet your objectives.
Conclusion
Repricing stock options can significantly impact your financial outlook and career decisions. By understanding the terms of your stock option agreement and seeking professional advice when needed, you can navigate these changes effectively and make informed decisions that benefit your financial well-being.
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