The following Employment Tax guidance note by Tolley in association with Andrew Rainford provides comprehensive and up to date tax information covering:
An option becomes an underwater option if the current price of the shares under option has fallen below the price payable on the exercise of the option. Underwater options cause concerns when there is no reasonable prospect of share price recovery in the short or medium term, eg two to five years.
Underwater options commonly arise if after an option is granted:
For the option holder, the option has no value and there is no financial incentive or reward.
For the employer, if underwater options do not incentivise employees, or have a demotivating effect, staff performance and retention may be affected. Employees can move job without losing valuable options and may seek better rewards elsewhere. Plan limits can prevent the employer granting further options.
For the shareholders, they will also have suffered as a result of the share price decline. They may not want employees and directors to have a special advantage by replacing underwater options. However, if the price fall is due to external challenges, the shareholders will want to keep key workers and find ways of
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