Options Backdating

Okay, super technical concept and term, but one that has extreme compensation differentials, depending on who you are and, well, how sleazy you want to be.

First start with the notion that stock options are granted as compensation for key employees in early-stage companies, and also for very senior officers of public companies. When companies are private, usually the board of directors oversees the granting of options. They commit to the number granted, who gets them, and the strike price of those options, usually done as options on common stock (not preferred), and granted at the last valuation done on the company by some cadre of value-assessing lawyers and bankers who did something very bad in a former life to end up deserving this kind of career.

In a private company, there "are no rules" in the manner in which public companies have tons of rules. In a private company, the view is generally that they are owned by a relatively small handful of people, all of whom are big girls and boys and know how the game is played. So option strike prices get granted with most or all parties knowing wassup.

In public companies, the diff is big. That is, stock options strike prices usually have a formula behind them, i.e. "whatever the end of day closing price of the stock is on the day said options are granted shall be the strike price of the options granted to said employee." Ok, but what date were the options officially granted? When the employee nodded vaguely that she'd accept the job? Or on the last Friday of last month? Or when they signed on the dotted Hellosign?

So then what happens if a stock was at $18 a share last month and zoomed on the announcement of the potential hire of a rockstar CEO? And, in fact, an ethical situation did, happen and it was with AAPL and Jobs' option package as CEO. Overly simply, the company backdated the strike price of his options a month or two or three (what's a few months among friends?). Well, it was about $22 in value appreciation per share from back-then $69 to about $90 a share, where the company set his strike at the $69 figure insted of the date-signed-on-bottom-line date when his options were granted.

Investors sued. Apple demurred. They hired better lawyers. They cared more. And the whole mess was quietly papered over. Nothing like a winner stock that's making "everyone" money to make it easier for legal (or at least ethical) violations like options backdating to, um, just go away.