What is the purpose of backdating stock options
Early exercises also have substantial penalties to the exercising employee.Those penalties are a) part of the "fair value" of the options, called "time value" is forfeited back to the company and b) an early tax liability occurs.
Any remaining "time value" component is forfeited back to the company when early exercises are made.These two penalties overcome the merits of "diversifying" in most cases.Stock option expensing was a controversy well before the most recent set of controversies in the early 2000s.The earliest attempts by accounting regulators to expense stock options in the early 1990s were unsuccessful and resulted in the promulgation of FAS123 by the Financial Accounting Standards Board which required disclosure of stock option positions but no income statement expensing, per se.The controversy continued and in 2005, at the insistence of the SEC, the FASB modified the FAS123 rule to provide a rule that the options should be expensed as of the grant date.If the market price falls below the stock exercise price at the time near expiration, the employee is not obligated to exercise the option, in which case the option will lapse.
Restrictions on the option, such as vesting and non-transferring, attempt to align the holder's interest with those of the business shareholders.
Finally the expense of the resulting number is rarely made on the grant date but in some cases must be deferred and in other cases may be deferred over time as set forth in the revised accounting rules for these contracts known as FAS123(revised).
the objective being to give employees an incentive to behave in ways that will boost the company's stock price.
If the company's stock market price rises above the call price, the employee could exercise the option, pay the exercise price and would be issued with ordinary shares in the company.
The employee would experience a direct financial benefit of the difference between the market and the exercise prices.
At that point, the employee may either sell the stock, or hold on to it in the hope of further price appreciation or hedge the stock position with listed calls and puts.