The last time our company's stock was valued was in mid-2014. As a startup, we have not yet had audited financial statements. We are currently planning a new round of stock valuation. If the new valuation results in the fair market value (FMV) of the company's stock being lower than the previous level, we would like to propose adjusting the exercise price of previously granted stock options. If this adjustment is feasible and approved by the board of directors, how far back can we retroactively adjust?

Regarding the above question, it needs to be considered comprehensively from legal, tax, and corporate governance perspectives. First, adjusting the price of granted options (commonly referred to as "repricing") is not absolutely prohibited, but it is subject to many restrictions, especially when the options have been exercised or involve incentive stock options (ISOs).

Key Considerations

1. Board Approval and Shareholder Consent

Repricing typically requires board approval and may require shareholder consent, depending on the laws of the company's jurisdiction of incorporation and the terms of the option plan. If the option plan does not explicitly allow repricing, the plan must be amended, which often requires a shareholder vote.

2. Tax Implications

For incentive stock options, repricing may cause them to lose ISO status and become non-qualified stock options (NSOs), resulting in ordinary income tax liabilities. Additionally, if the adjusted exercise price is lower than the FMV on the grant date, it may trigger adverse tax consequences under Section 409A of the Internal Revenue Code.

3. Timeframe for Retroactive Adjustments

Regarding the question of "how far back can we go," there is no uniform answer. In practice, repricing is typically only applied to unexercised options, and the effective date of the adjustment is generally set on or after the date of board approval, rather than retroactively to the original grant date. If retroactivity is truly necessary, it must be ensured that the adjusted price is not lower than the FMV on the effective date of the adjustment (or the new valuation date); otherwise, it may be deemed a compensatory arrangement, triggering additional tax issues.

Important Note: It is not recommended to implement repricing on your own without obtaining professional legal and tax advice. The specific circumstances of each company (such as jurisdiction of incorporation, option plan terms, and valuation methods) will affect feasibility.

Recommended Next Steps

  • Review the existing option plan and grant agreements to confirm whether they include repricing provisions.
  • Consult with professional legal counsel to assess legal restrictions and the required approval process.
  • Discuss the tax implications for employees and the company with a tax advisor, particularly regarding 409A compliance.
  • If you decide to proceed, ensure that the new exercise price is not lower than the FMV on the new valuation date and document the board resolution.

In summary, adjusting the price of granted options is theoretically possible, but the timeframe for retroactive adjustments is typically limited, and compliance issues must be handled carefully. It is recommended to obtain professional guidance before taking action.