Backdating stock options definition


08-May-2018 18:20

This would mean that Jane's 2020 stock option grant would have an exercise price of per share instead of per share.

Let's say Jane now decides to exercise her stock options.

He pays the per share exercise price and can turn around and sell those shares on the exchange for each, netting a profit of per share, or ,000.

Granting stock options to employees is a generally accepted and perfectly legal form of compensating employees. Critics of backdating argue that the practice is difficult to detect and thus encourages boards and executives to use it to synthesize more creative compensation packages.

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For example, let's assume Jane Smith is the CEO of Company XYZ.

That allowed companies to essentially pick the lowest stock price during that two-month period and report that as the exercise price on the options, giving companies a way to grant instantly profitable options to employees.

Today, regulations in the Sarbanes-Oxley Act require companies to report option grants to the SEC within two business days.

On the day she decides to exercise her options, Company XYZ shares are trading at .

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Under normal circumstances, she pays the per share exercise price and can turn around and sell those shares on the exchange for each, netting a profit of per share, or ,000 total.

This makes the options in-the-money for the grantee (Jane Smith, in our example), basically giving her options that are instantly profitable.