We plan to eventually grant options to advisors of our startup. Some advisors signed agreements several years ago, before the company had a 409A valuation. Now that the company's valuation has increased significantly, the exercise price has risen accordingly. Under these circumstances, is it necessary to make a "true-up" adjustment to the advisor shares? If so, what calculation method would be fair?

Background and Core Issue

Advisors typically receive options with a low exercise price in exchange for early services. However, if there is a long interval between the signing of the agreement and the formal grant, and the company's valuation increases significantly during that period, advisors may face exercise costs far higher than expected. This is not uncommon, especially after startups go through multiple funding rounds or 409A valuation updates.

The concept of "true-up" you mentioned refers, in equity incentive practice, to adjusting the number of granted shares or the exercise price so that the recipient receives economic value consistent with the original intent. However, this practice is not an industry standard and needs to be considered in light of specific agreement terms and company policies.

Common Adjustment Approaches

  • Repricing the exercise price: Lower the exercise price to the fair market value (FMV) at the time the agreement was signed, but be mindful of tax implications (e.g., IRS Section 409A).
  • Increasing the number of granted shares: Issue additional options in proportion to the valuation difference to compensate for the loss in value caused by the higher exercise price.
  • Cash compensation: Pay the difference in cash, though this is less common for early-stage startups.

Fair Calculation Method

If an adjustment is chosen, a common formula is:
Adjusted number = Original number × (Current FMV - Original exercise price) / (Current FMV - Adjusted exercise price)
Or use the "value equivalence" method: ensure that the intrinsic value of the option after adjustment (FMV - exercise price) is comparable to the expected value at the time the agreement was signed.

For example, if the FMV at signing was $1 with an exercise price of $0.10, and the current FMV is $10 with an exercise price of $9, the original option had a per-share value of $0.90, while the current per-share value is $1. To maintain total value, the number of shares could be increased accordingly.

"A true-up adjustment is not mandatory, but if the advisor agreement explicitly promised specific economic incentives, the company may have a moral or contractual obligation." — An equity compensation advisor (unnamed)

Key Considerations

  • Agreement terms: Check whether the original agreement includes "anti-dilution" or "fair adjustment" clauses.
  • Tax compliance: Any exercise price adjustment must comply with 409A requirements to avoid triggering punitive taxes.
  • Board approval: Adjustments must be formally approved by the board or compensation committee and documented.
  • Transparent communication: Clearly explain the adjustment logic to advisors to avoid future disputes.

Industry practice

In early-stage startups, if the interval between signing the advisor agreement and the grant exceeds 12 months and the valuation has changed significantly, some companies choose to make adjustments. However, more often, companies renegotiate a new grant rather than retroactively adjust the old agreement.

Ultimately, whether to adjust depends on the company's valuation of the advisor's contribution, legal risks, and financial capacity. It is recommended to consult a professional lawyer or equity compensation advisor to develop a plan based on the specific agreement and valuation report.