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409a timing with option grant

Hi, We want to grant options to a new hire on 9/10/14. We are receiving our new valuation, with a valuation date of 8/31/14, at the end of September. Are we allowed to use our old valuation from 8/31/13? Or will we have to reprice the new hire's options? Thanks for the input! John

Answers

Mark Spears
Title: Corporate Controller/Chief Accounting Of..
Company: None
LinkedIn Profile
(Corporate Controller/Chief Accounting Officer, None) |

First question is whether your shares are publicly traded and whether there is any volatility? If public then you can look at diff in share price 9/10 vs 8/31 and consider flexing the value for any diff. If not public then document any factors that support why there is no volatility (consider internal factors such as whether any significant change in your company's business and external factors such as whether the stock market environment changed which could have been due to interest rate movements or world events).

Topic Expert
Bob Stenz
Title: Controller
Company: Silicon Valley start-up
(Controller, Silicon Valley start-up) |

Assuming your BOD will only approve options at FMV, I'm not seeing a way around the presumed 8/31/14 valuation (and option price) increase. It may help to explain to the new hire that this is the result of the new hire start date and BOD policy (not management or the accounting department).

Anonymous
(CFO/Board Advisor) |

If you are public, you don't need a 409A valuation as your stock already has a "readily determinable fair market value". You can use the closing price of your shares on 9/10. So, I assume you are not public. As such, your shares don't have a "readily determinable fair market value". Thus, the need for a 409A valuation. I'll also assume that you don't have any share transactions occurring after 8/31 and prior to 9/10.

In any event, you don't want to reprice the options for a number of reasons as that really opens up a can of worms that no one wants, e.g. if the Options are meant to be ISO's they would not qualify (exercise price doesn't equal or exceed FMV on date of Grant), and would make them NQs by definition.

Based on the above here is what I would do. I would have the Grant Date of the Option be October 1, and use the Auigust 31 409A valuation as the Exercise Price.

Some other comments:

Is there any reason for the September 10 date? If it is for vesting to start, I'm certain your Plan allows vesting to begin at a date other than the Grant date. And, in the end we are only talking about 20 days anyway.

Have the offer letter state: "you will be granted an option to purchase X,XXX shares, subject the BOD approval, with an exercise price not less than the FMV of the underlying stock on the date of Grant." You may also consider spelling out the vesting terms, acceleration on change of control, and and termination/forfeiture terms in the even the employee is separated from employment.

Christopher Richied
Title: CFO
Company: Cancer Prevention Pharmaceuticals
(CFO, Cancer Prevention Pharmaceuticals) |

usually the 409a valuation can be carried forward for some length of time, some people say 6 months, others use it for a full year into the future.

you're not "re-pricing" the options, you're pricing them for the first time. the SEC is very diligent in looking for "back-dating" of options, so you don't want to do anything that remotely appears like that if you plan on going public someday. the following must be established in a board resolution before an equity grant can be considered granted: number of shares, Type (ISO, NQSO, restricted stock, etc.), exercise price (or share value for restricted stock), vesting schedule. interestingly, the exercise price can be expressed in the resolution as "the FMV on the date of grant," even though your valuation applicable to that date may not be ready for a couple of months. once it is established, i recommend a second resolution by the board adopting that valuation and saying that it applies specifically to the grants the board made on date xxx.

is the grant date of 9/10/14 also the employee's start date or do they start earlier? if it's 9/10/14, then i don't believe the grant date can be 9/1/14 as someone suggested above. if the employee does start earlier, one thing you can do to help them is start the vesting from their start date rather than the grant date. our board generally grants options only once or twice a year, and vesting begins back on the employee's actual start date, even if it's, say, 8 months earlier. the exercise price, though, must be based on the FMV on the date the board granted the option, not the employee start date.

in the grand scheme of things, unless there has been some tremendous upward movement in your valuation over the past year, the difference in exercise price probably won't even be remembered a few years from now when you're public.

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