stock option grant being cancelled because strike price greater than FMV and replaced with a new grant at a higher strike price
"What could the tax issues with the IRS be? I thought (but not totally certain) that the tax treatment of an ISO option was based on difference between exercise price and FMV at the time of the sale.  This is an accounting issue. There were times not so long ago that companies actually did these things on purpose, to boost the stock grant values for their employees (especially senior employees). They would give a grant but date it with an earlier date with a more favorable valuation. This is called ""backdating"", and it brought companies down and CEOs into criminal courts. In addition, only reasonable compensation is allowed as a deduction for the company, and incorrectly set strike price may be deemed unreasonable. Thus, the deduction the company would take for your compensation can be denied, leading to loss of tax benefit (this was also a weapon used by the IRS at the time against companies doing backdating). Last but not least, company that has intentions of going public cannot allow itself such a blatant disregard of the accounting rules. Even if the mistake was not made on purpose (as it sounds), it is a mistake that has to be corrected. What should I take into consideration to determine whether a 27% increase in shares is a fair exchange for an increase in 270% increase in strike price. Did you know the strike price when you signed the contract? Was it a consideration for you? For most people, the strike price is determined at the board approval, since the valuations are not public and are not disclosed before you actually join, which is already after you've agreed to the terms. So basically, you agreed to get 100 sheets of toilet paper, and instead getting 127 sheets. So you're getting 27 sheets more than you initially agreed to. Why are you complaining? In other words, options are essentially random numbers which are quite useless. By the time you get to exercise them, they'll be diluted through a bunch of additional financing rounds, and their value will be determined for real only after the IPO, or at least when your company's stocks are trading OTC with some reasonable volume. Until then - it's just a number with not much of a meaning. The FMV does matter for early exercise and 83(b) election, if that is an option, but even then - I doubt you can actually negotiate anything." Both you and the Company were probably benefitted by this decision.  Specifically an option grant that was not FRV or more would require you to recognize the option as income whether you had exercised it or not.  Additionally a host of other 409A tax issues/penalties could have been levied against you as an employee recipient.  I certainly appreciate your concern about a change in compensation, but this is one where Corporate America likely saved your bacon.
That price is the post-tender price, which already reflects arbitrage.  It's less than $65 on the market because that's the highest offer out there and the market price reflects the risk that the $65 will not be paid.  It also reflects the time value of money until the cash is disbursed (including blows to liquidity). In other words, you are buying the stock burdened with the risk that it might rapidly deflate if the deal falls through (or gets revived at a lower price) or that your money might be better spent somewhere other than waiting for the i-bank to release the tender offer amount to you. Two months ago JOSB traded around $55, and four months ago it traded around $50.  If the deal fails, then you could be stuck either taking a big loss to get out of the stock or waiting months (or longer) in the hope that another deal will come along and pay $65 (which may leave you with NPV loss from today).  The market seems to think that risk is pretty small, but it's still there. If the payout is $65, then you get a discount for time value and a discount for failed-merger risk.  That means the price is less than $65.  You can still make money on it, if the merger goes through.  Some investors believe they have a better way to make money, and no doubt the tender offer of the incipient merger of two publicly traded companies is already heavily arbitraged.  But that said, it may still pay off. Tender offer arbitrage is discussed in this article. There's an odd anomaly that often occurs with shares acquired through company plans via ESPP or option purchase. The general situation is that the share value above strike price or grant price may become ordinary income, but a sale below the price at day the shares are valued is a capital loss.  e.g. in an ESPP offering, I have a $10 purchase price, but at the end of the offering, the shares are valued at $100. Unless I hold the shares for an additional year, the sale price contains ordinary W2 income. So, if I see the shares falling and sell for $50, I have a tax bill for $90 of W2 income, but a $50 capital loss. Tax is due on $90 (and for 1K shares, $90,000 which can be a $30K hit) but that $50K loss can only be applied to cap gains, or $3K/yr of income.  In the dotcom bubble, there were many people who had million dollar tax bills and the value of the money netted from the sale couldn't even cover the taxes. And $1M in losses would take 300 years at $3K/yr.  The above is one reason the lockup date expiration is why shares get sold. And one can probably profit on the bigger companies stock.  Edit - see Yelp down 3% following expiration of 180 day IPO lock-up period, for similar situation. Most national banks are required by the regulations of their host countries to hold significant reserves in the form of government debt. A default would likely wipe out their capital and your common stock would become worthless. The common stock only has positive value today because of the option value based on the possibility the host country will evade a default. Stock options represent an option to buy a share at a given price.  What you have been offered is the option to buy the company share at a given price ($5) starting a given date (your golden handcuffs aka vesting schedule). If the company's value doubles in 1 year and the shares are liquid (i.e. you can sell them) then you've just made $125k of profit.  If the company's value has gone to zero in 1 year then you've lost nothing other than your hopes of getting rich. As others have mentioned, the mechanics of exercising the option and selling the shares can typically be accomplished without any cash involved.  The broker will do both in a single transaction and use the proceeds of the sale to pay the cost of buying the shares.  You should always at least cover the taxable portion of the transaction and typically the broker will withhold that tax anyways.  Otherwise you could find yourself in a position where you have actually lost money due to tax being owed while the shares decline in value below that tax.  You don't have to worry about that right now. Again as people have mentioned options will typically expire 10 years from vesting or 90 days from leaving your employment with the company.  I'm sure there are some variations on the theme.  Make sure you ask and all this should be part of some written contract.  I'm sure you can ask to see it if you wish.  Also typical is that stock option grants have to be approved by the board which is normally a technicality. Some general advice: "When the buyout happens, the $30 strike is worth $10, as it's in the money, you get $10 ($1000 per contract). Yes, the $40 strike is pretty worthless, it actually dropped in value today. Some deals are worded as an offer or intention, so a new offer can come in. This appears to be a done deal. From Chapter 8 of CHARACTERISTICS AND RISKS OF STANDARDIZED OPTIONS - FEB 1994 with supplemental updates 1997 through 2012; ""In certain unusual circumstances, it might not be possible for uncovered call writers of physical delivery stock and stock index options to obtain the underlying equity securities in order to meet their settlement obligations following exercise. This could happen, for example, in the event of a successful tender offer for all or substantially all of the outstanding shares of an underlying security or if trading in an underlying security were enjoined or suspended. In situations of that type, OCC may impose special exercise settlement procedures. These special procedures, applicable only to calls and only when an assigned writer is unable to obtain the underlying security, may involve the suspension of the settlement obligations of the holder and writer and/or the fixing of cash settlement prices in lieu of delivery of the underlying security. In such circumstances, OCC might also prohibit the exercise of puts by holders who would be unable to deliver the underlying security on the exercise settlement date. When special exercise settlement procedures are imposed, OCC will announce to its Clearing Members how settlements are to be handled. Investors may obtain that information from their brokerage firms."" I believe this confirms my observation. Happy to discuss if a reader feels otherwise." "This is a great question.  I've participated in a deal like that as an employee, and I also know of friends and family who have been involved during a buyout.  In short:  The updated part of your question is correct: There is no single typical treatment.  What happens to unvested restricted stock units (RSUs), unvested employee stock options, etc. varies from case to case. Furthermore, what exactly will happen in your case ought to have been described in the grant documentation which you (hopefully) received when you were issued restricted stock in the first place. Anyway, here are the two cases I've seen happen before: Immediate vesting of all units.  Immediate vesting is often the case with RSUs or options that are granted to executives or key employees.  The grant documentation usually details the cases that will have immediate vesting.  One of the cases is usually a Change in/of Control (CIC or COC) provision, triggered in a buyout.  Other immediate vesting cases may be when the key employee is terminated without cause, or dies.  The terms vary, and are often negotiated by shrewd key employees. Conversion of the units to a new schedule.  If anything is more ""typical"" of regular employee-level grants, I think this one would be.  Generally, such RSU or option grants will be converted, at the deal price, to a new schedule with identical dates and vesting percentages, but a new number of units and dollar amount or strike price, usually so the end result would have been the same as before the deal. I'm also curious if anybody else has been through a buyout, or knows anybody who has been through a buyout, and how they were treated." Their reasoning is probably that by eliminating the option for company stock, employees now are exposed to less risk. That is, if the company goes bk, they're only exposed to the company through their paycheck and not their paycheck plus retirement savings.   In reality, it's probably a classic case of buy high and sell low. That is, your plan admin (HR or legal, probably) thinks that since the price went down, they should sell. It could be that the contracts were bought at cheaper prices such as $.01 earlier in the day. What you see there with the bid and ask is the CURRENT bid and CURRENT ask. The high ask price means there is no current liquidity, as someone is quoting a very high ask price just in case someone really wants to trade that price. But as you said, no one would buy this with a better price on a closer strike price. The volume likely occurred at a different price than listed on the current ask. "A little terminology: Grant: you get a ""gift"" with strings attached. ""Grant"" refers to the plan (legal contract) under which you get the stock options. Vesting: these are the strings attached to the grant. As long as you're employed by the company, your options will vest every quarter, proportionally. You'll become an owner of 4687 or 4688 options every quarter. Each such vest event means you'd be getting an opportunity to buy the corresponding amount of stocks at the strike price (and not the current market price which may be higher). Buying is called exercising. Exercising a nonqualified option is a taxable event, and you'll be taxed on the value of the ""gift"" you got. The value is determined by the difference between the strike price (the price at which you have the option to buy the stock) and the actual fair market value of the stock at the time of vest (based on valuations). Options that are vested are yours (depending on the grant contract, read it carefully, leaving the company may lead to forfeiture). Options that are not vested will disappear once you leave the company. Exercised options become stocks, and are yours. Qualified vs Nonqualifed - refers to the tax treatment. Nonqualified options don't have any special treatment, qualified do. 3.02M stocks issued refers to the value of the options. Consider the total valuation of the company being $302M. With $302M value and 3.02M stocks issued, each stock is worth ~$100. Now, in a year, a new investor comes in, and another 3.02M stocks are issued (if, for example, the new investor wants a 50% stake). In this case, there will be 6.04M stocks issued, for 302M value - each stock is worth $50 now. That is called dilution. Your grant is in nominal options, so in case of dilution, the value of your options will go down. Additional points: If the company is not yet public, selling the stocks may be difficult, and you may own pieces of paper that no-one else wants to buy. You will still pay taxes based on the valuations and you may end up paying for these pieces of paper out of your own pocket. In California, it is illegal to not pay salary to regular employees. Unless you're a senior executive of the company (which I doubt), you should be paid at least $9/hour per the CA minimum wages law." The penny pilot program has a dramatic effect on increasing options liquidity. Bids can be posted at .01 penny increments instead of .05 increments. A lot of money is lost dealing with .05 increments. Issues are added to the penny pilot program based on existing liquidity in both the stock and the options market, but the utility of the penny pilot program outweighs the discretionary liquidity judgement that the CBOE makes to list issues in that program. The reason the CBOE doesn't list all stocks in the penny pilot program is because they believe that their data vendors cannot handle all of the market data. But they have been saying this since 2006 and storage and bandwidth technology has greatly improved since then. What happened here is pretty obvious: You were trying to sell 2000 shares and apparently didn't mark your order to permit partial execution.  While they had a buyer at 94.66 they didn't want 2000 shares.  Thus your order went unfilled. Par value of common stock is essentially a historical artifact; it is a price at which the company will redeem shares directly.  If common stock has any par value at all, it is always so low that no one would ever redeem, preferring to sell in the market at a better price.  Par is obviously much more relevant to debt securities than equities. So you do need a strike price.  ljwobker's letter is a typical one, in that companies often make the strike price for granted options a formula based on the market price of the stock at the time of the grant, say 100% of market or 110% of market.  But you will obviously need to find out what strike your company is offering. "If the strike price closest to the underlying has high open interest, the options expiration is a bigger event.   For instance:  stock is at $20 w/ average volume of 100,000 shares per day.    20 strike has 1000 open interest.   In this example the stock will ""most likely"" pin at 20 if we were expiring tomorrow.     As u prob know, long calls at 19.90 close, turn into stock....long puts at 20.10 turn into short stock.   Option pros (high % of volume) dont want to be short or long after expiration.   Long call holders will sell above 20 to hedge, and long put holders will buy below 20.   1000 open interest is equivalent to 100,000 shares.   That's the same amount as the average volume.   Stock can't really move until after expiration.   If I am long 10 $20 calls, and short 1000 shares I am flat going into expiration.....unless the stock gets smoked and now I am synthetically long a put....Short stock + long call= Long Put Then watch out cause it was artificially locked down." "Simply put, yes. I bought that call. I was betting the shares would rise in value by Jan 2018, and chose the $130 strike. With a strike nearly a year away, I paid a premium that was all time value as the shares traded at   Now the shares are replaced by $128. The time value has gone to zero, and there is no intrinsic ""in the money"" value. If the shares were bought at $140, the time value stills drops to zero, but the option is closed at $10 in the money.  My answer was for a cash deal. In a case where the old shares are replaced by new shares or a combination of shares and money, the options terms are changed to reflect the combination of new assets for old.  Update based on disclosure that it's Monsanto we are discussing.   Bayer and Monsanto have announced that they signed a definitive   agreement under which Bayer will acquire Monsanto for USD 128 per   share in an all-cash transaction. Based on Monsanto’s closing share   price on May 9, 2016, the day before Bayer’s first written proposal to   Monsanto, the offer represents a premium of 44 percent to that price.  You can see that the deal has been in the works for some time now. Further research shows they expect the deal to close by ""the end of 2017"". It's not a done deal. This is why the options are still trading.   Now the shares are replaced by $128. The time value has gone to zero, and there is no intrinsic ""in the money"" value. If the shares were bought at $140, the time value stills drops to zero, but the option is closed at $10 in the money.  My answer was for a cash deal. In a case where the old shares are replaced by new shares or a combination of shares and money, the options terms are changed to reflect the combination of new assets for old.  Update based on disclosure that it's Monsanto we are discussing.  Bayer and Monsanto have announced that they signed a definitive   agreement under which Bayer will acquire Monsanto for USD 128 per   share in an all-cash transaction. Based on Monsanto’s closing share   price on May 9, 2016, the day before Bayer’s first written proposal to   Monsanto, the offer represents a premium of 44 percent to that price. You can see that the deal has been in the works for some time now. Further research shows they expect the deal to close by ""the end of 2017"". It's not a done deal. This is why the options are still trading." Sounds like an illiquid option, if there are actually some bidders, market makers, then sell the option at market price (market sell order). If there are not market makers then place a really low limit sell order so that you can sit at the ask in the order book. A lot of time there is off-book liquidity, so there may be a party looking for buy liquidity. You can also exercise the option to book the loss (immediately selling the shares when they get delivered to you), if this is an American style option. But if the option is worthless then it is probably significantly underwater, and you'd end up losing a lot more as you'd buy the stock at the strike price but only be able to sell at its current market value. The loss could also be increased further if there are even MORE liquidity issues in the stock.