Dating of stock option grants
Sometimes options permit “early exercise.” This means that the option can be exercised (and the underlying stock issued) before it vests.Sometimes people ask for this because they are sophisticated enough to understand the tax consequences and this works better for their own financial situation.Options will also have a vesting period like stock, but the vesting provisions work in the reverse.Typically an option only may be exercised after it vests.It is estimated that more than 100 companies are under investigation by SEC and that as many as 600 companies with aggressive accounting practices may have been involved in backdating. In this article I explore the impact of the introduction of the Sarbanes–Oxley Act (SOX) in 2002 and the Securities and Exchange Commission's implementation of the Act in 2006 on the options granting process.Some executives and boards have permitted stock option backdating – a practice which establishes the stock option grant reflecting a date in the past when the stock price was lower than the real date of the grant or when more favorable conditions existed for the cashing in of options held.
Aside from the tax and accounting consequences to the company, the potential penalties for those individuals involved in this scandal can range from criminal charges - - to shareholder lawsuits -- to SEC sanctions and -- to termination of employment.
I show that after the introduction of the SOX and its implementation the practice of backdating options was substituted with the practice of “spring loading” options around analysts’ price targets announcements.
We often get asked about the difference between the two most common forms of equity grants – stock and options.
The CEO Cash Time Machine - - Back Dating Options – a Form of Time Travel?
Stock options are generally granted to executives as an incentive – often at the fair market value of the stock price on the date of grant.