Underwater Stock Options and the Repricing Evolution

This article is reprinted with permission from The Metropolitan Corporate Counsel. 

In the wake of an unstable equity market, employee stock options of many public and "wanna be" public companies have lost their value, leaving many employees wondering where their nest egg has gone. Employee stock option plans were in many instances the primary motivational factor to an employee choosing to join a new economy or start-up company. Many employees viewed their stock options as their "early retirement plan."  Similarly, many employers used stock option plans to attract employees at less than competitive cash compensation packages. 

Stock options were a particularly compelling compensation strategy to companies that were either cash poor or were attempting to minimize compensation expenses. Once promising stock options are now underwater (i.e., the price of the underlying shares has fallen below the exercise price of the stock options). In an effort to retain their key employees, employers began "repricing" employee stock options by amending outstanding underwater stock options to reduce their exercise price.