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Finance Glossary

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Ooh. This is bad. Scandals. Jail. Silicon Valley soap opera. There was a time when stock options were free and easy or at least perceived as such. Some semi-clever CFOs, noting that their stock prices were quickly appreciating, used overly favorable dates upon which to set strike prices for options granted to employees. See call option.

When a key employee is hired into a young company, they are typically given a modest salary and bonus plan - and a generous option plan as young companies generally don't have lots of cash with which to pay employees. A package might include the salary and bonus details but then also 100,000 options.

The options usually have a 4 year vest provision (the employee must be in good standing at the company for 4 years to end up owning those options) and they must be sold within 10 years or so of them being granted. They are also granted with a strike price, which is usually determined as something like the average closing price over the last 120 days of trading or something generic like that.

So in the case when the stock is rocketing, there is a big different in taking the average trading price or the price that the stock was at 120 days ago. This was a core issue in the backdating scandals that hit Silicon Valley in 2008/9. And the numbers are big.

XYZ stock was at $80 a share 20 weeks ago - now it's at $200. In 4 years it might be at $400. The employee getting the $80 strike price on 100,000 shares will have appreciated $320 per share times 100,000 shares or $32 million. But if the employee had received as their strike price the average of $200 and $80, assuming an arithmetic set of closing price gains, the strike on their options would have been $140. The gain would then only" be an appreciation of $260 or $26 million.

Since the scandals the laws have become dramatically more stringent and clear and little has been heard about backdating since then.