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The board wishes to grant a key employee stock options.
The firm grants and falsely reports March 1 as grant date and pretends stock to be issued “ At-the-money” thus backdating options.
Lawyers who were trained in commonwealth jurisdictions may have an ingrained concept that backdating a document is generally improper, if not illegal.
This is reflected in the Linklaters article Execution of Documents: Five Common Questions Answered, which offers the following advice for in-house lawyers: “(i) contracts may only be backdated, absent fraud, in circumstances where an original form has been lost or where terms have been fully agreed but signatures have been left to a later date and (ii) deeds may never be backdated.” Unfortunately, the article offers scant authority, and a search on Google reveals little else on the subject from the commonwealth world.
She maintains a public blog at aimed at startups, and has guest blogged at different startup platforms such as The Startup Garage and Belmont Acquisitions.
DISCLAIMER: The information provided is intended to educate the readers and a more definite answer should be based on a consultation with a lawyer or CPA.
The recipient of the stock takes advantage of a lower stock price which translates into greater profit when the options are exercised.
I didn’t realise we were not connected properly to the ATO via our software and have missed reporting two pay runs.
As we know, the value of option depends upon the exercise price.
The higher the exercise price the less likely the option can be exercised profitably.
This yields larger profit to the key employee as the options are already “in-the- money.” On the other hand, shareholders are told that key employee(s) are getting "At-the-money” options.
Backdating allows companies to pay their executives more, while reporting lower compensation amounts in their book of accounts.