Can I reprice stock options if a subsequent 409A valuation is lower than the exercise price?

Takeaway: Yes, repricing underwater stock options is legally possible, but it is a complex process with accounting, tax, and governance implications. It should be carefully considered as part of a retention strategy when option grants no longer provide meaningful incentive.

When a company’s valuation declines, employees may hold “underwater” options - grants with an exercise price above the current fair market value. In these cases, boards often ask whether repricing options to the new, lower value is an option. The answer is yes, but it comes with significant considerations.

How Repricing Works

For private companies, repricing is typically done by amending the option grant to reduce the exercise price to the current fair market value (FMV), often supported by a new 409A valuation. Unlike public companies, private companies rarely pair this with reductions in share counts or other structures.

Who Can Participate

Most companies reprice all outstanding underwater options held by current employees and service providers. Former employees are usually excluded due to securities law limitations and concerns about corporate waste.

Vesting and Terms

The most common approach is to keep the existing vesting schedule in place. While some companies add new vesting or blackout periods, this can complicate the process and may require optionee consent. Importantly, a repriced option is treated as a new grant for accounting and tax purposes, which can reset the expiration date and, for ISOs, restart holding periods.

Required Approvals and Compliance

  • Board Approval: Always required.

  • Stockholder Approval: Not always required for private companies, unless an investor rights agreement, equity plan, or other governing document mandates it.

  • Securities Law Compliance: Repriced options are treated as new securities issuances and must qualify under Rule 701 or another exemption.

  • Tender Offer Rules: If repricing requires employee consent (especially with adverse changes like added vesting), SEC tender offer rules may apply, requiring the offer to remain open at least 20 business days.

Accounting and Tax Considerations

  • Accounting: Repricing generally creates an incremental expense equal to the increase in fair value of the repriced options over the originals. This charge is recognized at the time of repricing.

  • Tax (ISOs): Repricing ISOs may reduce the number eligible for ISO treatment under the $100,000 annual limit and restarts the ISO holding period. Repriced ISOs may also convert into NSOs if limits are exceeded.

  • Section 409A: The new exercise price must be at or above FMV on the repricing date to avoid Section 409A penalties.

Strategic Alternatives

Because repricing is administratively complex and can create perception issues, many companies consider alternatives such as:

  • “Top-up” grants: Issuing additional options at the current FMV while leaving underwater options outstanding.

  • New-hire-style grants: Providing new equity awards sized appropriately for retention without formally repricing existing options.

Disclaimer: This post is for general informational purposes only and does not constitute legal, tax, or financial advice. Reading or relying on this content does not create an attorney–client relationship. Every startup’s situation is unique, and you should consult qualified legal or tax professionals before making decisions that may affect your business.