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Does a company have to complete a 409a valuation to reprice stock options? Is there another way a company can reprice their option strike prices?

A friend's company has decreased in value over the past year and they'd like to reprice their stock options for their employees so they have the opportunity to benefit more in the upside as the company starts to perform better again.  They are trying to determine the best way to set the new strike price and reprice all of the previously issued options.  Can someone provide feedback if you've done this before or have ideas?

Answers

Ted Monohon
Title: VP -Finance / Controller
Company: Fantex
(VP -Finance / Controller, Fantex) |

You don't need to get a 409A, however, you risk the IRS coming back after the fact (several years down the line) and telling you that the value you came up with was too low. (you actually risk this everytime you issue options without proper 409A documentation). This then becomes a huge tax issue for your EMPLOYEES, not necessariy the company. Your employees will be required to pick up the additional income and forced to pay additional income taxes plus penalties (they may sue the company for the difference). There are alternatives to getting a 409A valuation, however, you are best served by getting one completed by a compentent valuation expert. You will also want something to support any 123R computations you might make due to the repricing. Althought it is a non-cash charge to the P&L, you need to make sure you don't violate any loan convenants you might have in place due to the restatement.

It is painful to do a 409A, but it is in place to make sure that you issue options at FMV and not below. Good luck. . repricing is a lot of paperwork.. make sure you have a good legal team work on it as you also have to look out for any ISO adjustments that push you over the IRS 100k limits.

Luke Vernon
Title: COO
Company: Eco-Products
(COO, Eco-Products) |

Thanks for your insight. Much appreciated

Steven Olson
Title: Managing Partner
Company: New Venture Support, Inc.
(Managing Partner, New Venture Support, Inc.) |

Generally, their legal counsel should be able to provide guidance around this issue. An independent 409a valuation is really just a safe harbor exercise for the IRS. The issue there is that if you have under valued the strike price, it could have tax implications for both the option holder and the issuer.

Luke Vernon
Title: COO
Company: Eco-Products
(COO, Eco-Products) |

Thanks for your insight. Much appreciated

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