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Should you adjust Advisor shares for delay in strike price?

Asked on April 8, 2016

We plan to finally issue option grants to Advisors for our startup. A few of the Advisors signed agreements several years ago before we did a 409A. Our valuation is much higher now, as is the strike price. Is it common to true-up the Advisor shares and if so, what is a fair way to calculate this?

Answers

Dale Bolen VP Accounting • April 8, 2016

Ouch! Those advisors lost out on appreciation of the company value. 409A reg’s – if I recall correctly…check with a knowledgeable tax advisor – don’t allow issuance of below-market equity instruments. Well, you can set the strike price below market, but then the value is taxable immediately. For GAAP, you’ll have similar issues if strike is below market – expense now for the below market amount plus variable accounting every reporting period.

You could grant more options, but the board and founders won’t be happy about the extra dilution.

Hopefully some others here will have some ideas. Good luck mediating something equitable for all.

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