A hot issue on many companies' agenda of late is employee option re-pricing, the result of a growing need of many hi-tech firms to come up with incentives for their workers, who have seen the shares their options are based on reduce to well below their options' original sale price.
CommTouch Software (Nasdaq:CTCH) and BackWeb (Nasdaq:BWEB) discovered repricing at the beginning of the year. ECI Telecom and Comverse Technology (Nasdaq:CMVT), which announced option re-pricing only two days ago, are the last to have gone that route.
But not for long. Eyal Ben-Yaakov, hi-tech partner in Ernst & Young, estimated yesterday at the firm's annual convention that companies will have to find new ways to compensate their employees. Ben-Yaakov says those who are not busy looking for new ways have "limited foresight".
"It is important to watch the market, because once it picks up, workers will be looking at their employment conditions, and if they see disparity between them and other companies, their decisions may damage the company, which will find itself out of the game,¿ he concluded.
This trend may also affect private companies which will be forced into the now all too common down rounds. Add this to the fact some investors expect double the return on their investment upon exiting, and the negative impact on the workers becomes obvious.
Cutting options price to zero, a step some companies revert to, may be simple, but creates a tax event for the company's American workers.
Another route to take is the one Comverse chose. It let workers cancel their current option plan and define a new one, to begin six months after the first one expires. The risk, at no compensation, is thus shifted to the workers.
Unless the risk is shifted to the workers, they must be charged for the move. This is especially common in startups. Note one case when a new option plan was defined six months after an original one was cancelled. The options were in the money to begin with, meaning that at least financially, it was possible to exercise them.
Another technique used to receive tax benefits when exercising the options was the use of recourse notes as opposed to the more problematic non-recourse notes. Recourse notes are loans given to the worker, for which he must provide collateral other than the shares themselves.
To prevent a tax event, by demonstrating the employee's burden of risk, the company must have a history of collecting these loans, even through seizure of the worker's assets. If the company meets that criteria, the sale of the options automatically becomes tax-exempt.