Stock options are typically a critical component of a private company’s ability to recruit, incentivize and retain key talent. Particularly for early-stage companies, rewarding equity packages can help make up for the gap between the cash compensation a startup can offer against the more significant cash compensation their larger competitors can afford to pay. However, when stock options have exercise prices that are higher than the fair market value of the underlying stock (i.e., when the options are “underwater”) they lose most, if not all, of their incentive and retentive value. And where there is a competitive market for talent, the lack of effective equity incentives may make the departure of key employees more likely. As a result, a company may determine that a repricing of underwater options is necessary to retain executives and other employees who are instrumental in the company’s future success.
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