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Can BOD stock option approval predate employment start date?

For example, our BOD meeting is in Feb and occurs every quarter. We have accepted offers which we want to include in Feb approval. But the employees will not be on board until March. The vesting will start on employment start date. Do I have a problem with it? Is there a clear rule on this? My concern is that it is theoretically possible the price can change between BOD approval date and employment start date. My company is a private company.

Answers

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

It boils down to what your Board wants. You can have it approved in Feb. But if you really want to be safe, you can request approval in Feb and a reconfirmation next meeting. You can also just opt to docket it next board meeting for informational purposes.

As you said, the price change is "theoretical". It is also "theoretically" possible that your company will shut down next week. Well...you get my point. Besides, volatility in private share prices is almost non-existent unless you are expecting something major that will affect your company's valuation between Feb meeting and employee start dates. Even then, a formal valuation estimate needs to be made for it to be the basis of the stock price.

Lyle Newkirk
Title: CFO
Company: Corrigo Incorporated
(CFO, Corrigo Incorporated) |

I know that at least in California you cannot grant an option unless the employee is already on the payroll. I am not sure if that is the case in other states but it clearly is the case in CA.

Randall Bolten
Title: CEO
Company: Lucidity
LinkedIn Profile
(CEO, Lucidity) |

You should check with a tax expert. My knowledge is a few years old, but legally speaking, the a company (i.e., via the board of directors) can grant options to anyone it wants to. The real issue is how the options are treated for tax purposes and to a lesser extent (at least since FAS 123) for external reporting purposes.

I believe that if an option is granted before the employee's start date, and at a price that's lower than the fair market value of the stock on the start date, the employee must treat the "shadow profit (i.e., the difference in the two prices times the number of shares granted) as ordinary income right then on the start date, which can be a real bite. And I also believe that in order for an option grant to qualify for the more favorable ISO (Incentive Stock Option) treatment, it MUST be granted on or after the employee's start date.

If the timing of board meetings to grant the options is a problem, there are ways around that. For example, the board can meet telephonically at other times for the sole purpose of option grants. Or the board can delegate one of its members -- typically the CEO -- to make option grants at any time. That delegation typically has limitations, such as new hire grants only (i.e., not follow-on or performance-related grants), limitations on the number of shares that can be granted, and who can receive the grants (e.g., non-officers).

Again, check with a tax expert.

Randall Bolten
Title: CEO
Company: Lucidity
LinkedIn Profile
(CEO, Lucidity) |

I'll add one more point that may be clear to all who read this, but I'll make it anyway: All of this discussion presumes that when the BOD meets to grant the option(s), the strike price of the options is the fair market value of the shares ON THAT DATE. The incentive to grant options promptly is typically driven by fears that the FMV will rise in the near term. It is legal to grant options at a price below the FMV but the consequences, from the perspectives of both the employee's income taxes and the company's GAAP reporting, are horrendous.

That fact that your company is private mitigates the problem of shifting prices -- after all, it's not as if there's a publicly disclosed price that changes daily. Moreover, if you're a private company, perhaps you don't have so many employees, nor are you hiring at such a rate that granting options promptly after their hire dates is a processing burden. And the price can simply be the valuation from the company's most recent 409-A valuation. Again, a tax expert can tell you how often a 409-A valuation should be performed, or what corporate events might trigger the need for a new one.

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