Down-Round Financings and Outstanding Equity Compensation
Personal Finance, ISO Options, AMT Taxes, Startup Equity
Password Stock-Based Compensation Start-up companies frequently use stock-based compensation to incentivize their executives and employees. The use of stock-based compensation, however, must take into account a myriad of laws and requirements, including securities law considerations such as registration issues , tax considerations tax treatment and deductibility , accounting considerations expense charges, dilution, etc.
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This post is based on a Davis Polk memorandum by Ms. Lin, Byron Rooney , and Brian Sieben. And one of the thorniest issues in dealing with down rounds is how a former unicorn keeps its employees after destroying the value of their shares. This is particularly true if employees hold stock options, which are typically viewed to be valuable only to the extent that the per share value of the company is higher than the exercise price of the options that they hold. And, a company must nevertheless account for options that are not providing value to employees.