Retaining Talent Amidst Falling Share Prices and Underwater Options

Written By: Robyn Shutak

Recently, many companies have found themselves with a significant portion of their employees’ outstanding stock options “underwater” or “out of the money” due to plummeting share prices.  This downward pressure is due in part to the conflict in Ukraine, supply chain disruptions, rising interest rates, and other macroeconomic factors that continue to impact the broader economy and public companies across a variety of sectors.

To top it all off, the labor market remains tight and companies are struggling to retain talent.  Doing so is especially difficult when employee stock options awarded during better times are now “underwater” and have therefore lost much of their incentive value. In an effort to retain and motivate workers in the face of the “Great Resignation” or “Big Quit,” pressure can quickly mount on boards and management to address this mismatch by exchanging or repricing their underwater options. 

If options remain underwater for too long, employee morale and retention can be negatively affected. This applies not just to rank-and-file employees, but to senior management as well.

Given this risk, it’s no surprise that a number of clients have asked us what levers are available for retaining talent in the face of this recent decline in equity values. While we may be early in the economic cycle for an underwater option exchange or repricing, they do remain a possible tool in the toolkit for both public and private company issuers. 

That said, deciding whether or not to exchange or reprice underwater options is a multifaceted assessment, and highly dependent on individual company facts and circumstances. As such, we want to present a few ideas and questions to consider before instituting an option exchange or repricing in an effort to retain talent. 

Considerations Before Exchanging/Repricing Underwater Options

Before exchanging or repricing underwater options to retain talent, we encourage you to reflect on the following questions and their implications for your company:

Why Have Share Prices Declined? And When are They Expected to Recover?

Currently, many companies’ share prices are under pressure for a variety of reasons. Some companies are battling rising labor and input costs. Others have specific supply chain bottlenecks. High-growth companies have seen their valuation multiples compress as investors discount the net present value of their future cash flows in the face of rising interest rates.  

These different issues will likely ease or resolve at different times. Other companies, however, may have permanent structural issues from which they will never recover. The severity of the specific problem you face and the timeline for recovery are both important factors to consider when weighing an option exchange or repricing. 

Will the Benefits of Your Option Exchange/Repricing Justify the Time, Cost, and Effort?

Implementing an option exchange or repricing is an involved process, and can take up significant bandwidth from important members of your team. If your team is already stretched from juggling labor shortages or overworked employees, this consideration becomes even more important. 

An option exchange or repricing will require time and energy from multiple departments and may require outside advisors and resources as well. As a general rule of thumb, companies should be prepared to spend three to six months on thoughtful design and implementation.

Consult a Trusted Partner for Your Company’s Equity Plan / Underwater Exchange or Repricing

If you do decide an option exchange or repricing is the best strategy for your company, you deserve the confidence of implementing one that is structured to benefit both employees and shareholders. We’re here to empower you toward an equity plan that successfully achieves your goals. Reach out to us at Infinite Equity to discover whether an underwater exchange or repricing is right for you, or if you’re seeking personalized guidance for the design of your company’s program.


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