The economic situation during these days imposes a lot of uncertainty and hardship on many companies. The COVID-19 epidemic affects almost every business and every employee. It requires many companies to temporarily shut their business or to reduce its operation. Thus, companies are seeking to reduce their costs, terminate employees, cut salaries, and more. We all know what moral effect a salary cut or job termination has on an employee, but it also has an effect on the employer, its ability to sustain talents, and its ability to sail in troubled waters without an extreme effect on its ability to get back to normal as quickly as possible.
One way to deal with the HR and other challenges is to compensate the employees with alternative instruments, i.e., options and similar equity awards while reducing the salaries or enforcing a leave of absence. That way, the business cash-flow would not be harmed, while the companies would be able to mitigate the negative consequences of the global crisis and maintain their quality man-force. Another way (that can work in parallel) is to consider a global plan repricing. We believe that the severe plunge of the capital market is affecting the value of options in private companies as well.
Repricing the exercise price of outstanding options immediately increases the equity value for the optionees and may be used to compensate for salary reduction. In Israel, such reduction of the exercise price requires a sign off by the tax authority in a green track pre-ruling. In the United States (including with respect to options granted to U.S. persons), such new valuation may allow companies to re-evaluate the exercise price of the options according to Section 409A of the Internal Revenue Code. Such repricing, according to the Code, results in a new grant which may affect the classification of the options due to the $100,000 limitation, holding period, and more.
We believe that repricing and reducing the exercise price to employees may sweeten the pill of comp reduction by making the options more attractive to employees. Any decision to amend the existing terms of equity awarded to employees, or equity to be awarded, should be carefully analyzed in order to make sure there is no violation of the U.S. and/or the Israeli tax law associated with such awards.
Our experienced tax team can assist in assessing your situation, developing a strategy and implementing it.
