Three basic approaches have emerged for addressing underwater options in today's business environment: Options-for-Options, Options-for-Stock, and Options-for-Cash. The form of consideration offered by the company in return for the employee's participation is the primary difference between the alternatives. The table below provides a general description and outlines the advantages and disadvantages of each approach. For a detailed discussion of how to design and implement one of these exchanges, read our white paper Addressing Underwater Options: Measured Responses to a Contentious Problem on this topic.
Descriptions of Underwater Exchange Approaches
Description | Advantages | Disadvantages |
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Approach 1: Options-for-Options | ||
Cancellation of underwater options followed by an immediate re-grant of (typically fewer) new options |
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Approach 2: Options-for-Stock (restricted stock or RSUs) | ||
Cancellation of underwater options followed by an immediate re-grant of (significantly fewer) new shares of restricted stock/units |
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Approach 3: Options-for-Cash | ||
Cancellation of underwater options for a (typically immediate) cash payment |
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