Private Company Stock Option Repricing: A Legal Guide

Repricing stock options can be a powerful way to restore incentive value and stabilize retention when market dynamics or company-specific factors have left awards underwater. For private companies, the legal path to a repricing is often more flexible than in the public company context, but it is not without traps.

This guide summarizes the core legal considerations when evaluating a repricing, with a focus on consent, governing documents, cross-border issues, potential tender offer implications, and key tax consequences for incentive stock options.

The legal landscape for private companies

Unlike public companies, private companies generally do not face statutory or exchange-driven requirements for option repricings. In most cases, the legal requirements are contractual in nature. This means the primary parameters to work within are the company’s governing documents and the equity plan and award agreements.

The analysis typically begins by answering two questions:

1. Do the company’s charter, investor rights agreements, voting agreements, or other governance documents require stockholder or investor approval for an option repricing or other modification of equity awards?
2. Do the equity incentive plan and option award agreements permit reduction of the exercise price without consent?

The answers to these questions determine whether the company can proceed unilaterally or must structure and solicit consents.

In practice, most private company equity plans give the company’s board of directors considerable discretion to amend awards and adjust terms. As a result, the board of directors ,or its compensation committee, is the body with authority to approve a repricing.  This authority and flexibility, however, is not universal and should never be assumed. A careful document review is essential at the outset.

When consent may not be required

If the only change is a reduction of the exercise price to current fair market value, many plans and award agreements permit implementation without holder consent. This “price-only” modification is typically viewed as a favorable change for the option holder, with no diminution of vesting or other economic rights, and therefore often can be undertaken unilaterally where documents so permit.

To rely on this approach, all of the following criteria typically apply:

• The plan expressly authorizes modifications or substitutions without consent
• There is no contrary provision in the charter or investor agreements
• The repricing does not alter vesting, post-termination exercise periods, or other material terms
• There are no side letters or board or stockholder approvals that imposing additional constraints.

When consent is typically required

Consent is often required when the repricing does more than reduce the strike price. Any change that could be characterized as adverse to the holder, or that materially alters the bargain, generally requires optionholder consent.

Common examples include:

• Restarting or extending vesting schedules
• Changing the form of consideration or award type
• Shortening post-termination exercise periods
• Adding restrictive covenants
• Reducing share counts as part of a value-for-value exchange.

Even where the plan permits unilateral action, it may be prudent to solicit consent if the modification is complex or affects rights beyond strike price. Doing so—while it increases the number of steps and documentation needed significantly—can reduce dispute risk, improves optics, and can clarify acceptance for tax and securities law purposes. 

Tender offer implications

Where consents are solicited or the structure invites holder elections, the company should consider whether the repricing constitutes a tender offer for US securities law purposes. In general, an offer to modify, exchange, or acquire outstanding equity securities from a class of holders on standardized terms can trigger tender offer rules. While private companies are not subject to the full public company tender offer regime under the US securities laws, a consent-based or elective exchange may still require adherence to process and disclosure requirements designed to protect holders. These include clear written disclosure of terms and risks, a fixed offer period, equal treatment of eligible participants, and avoidance of coercive conditions.

A price-only repricing implemented unilaterally and uniformly reduces the risk of tender offer characterization. By contrast, exchanges that allow holders to choose among alternatives or accept new conditions should be evaluated carefully under tender offer principles and implemented with appropriately structured documentation and timelines.

Non-US option holder considerations

Repricings that touch non-US participants introduce local employment, tax, securities, and exchange control considerations. A modification that is uncomplicated under US rules can have unintended consequences in other jurisdictions, including triggering new filing obligations, changing the timing or character of taxable income, affecting social insurance treatment, or violating local labor law if consent mechanics are insufficient.

Companies should coordinate local counsel review for each relevant country, confirm whether consents must meet local form or language requirements, and ensure offer materials and timelines align with applicable securities or employment regulations.

Some companies stagger implementation, repricing US awards first and addressing non-US jurisdictions as local analyses conclude. Other companies condition effectiveness on completion of country-by-country checks. Whichever approach is chosen, it is important to document the approach and maintain consistent communications to avoid unequal treatment concerns.

Tax and securities law consequences: ISOs and Rule 701

For incentive stock options, a repricing is generally treated as a re-grant for ISO purposes. This has several effects. The $100,000 annual limit on the aggregate fair market value of stock subject to ISOs that first become exercisable in a calendar year is measured anew with the modified award, which can cause a portion of the repriced ISOs to convert to nonqualified stock options if the limit is exceeded.

In addition, the ISO holding periods—two years from grant and one year from exercise—restart as of the repricing date because the modification is treated as a new grant. Employees who were close to satisfying ISO holding periods may wish to evaluate timing and exercise decisions in light of the reset holding periods.

A stock option repricing is typically treated as a material modification that constitutes a new “sale” for Rule 701 purposes, which means the repriced awards must be included in the 12‑month aggregate sales calculation and can cause the issuer to cross Rule 701’s dollar or share limits. If the repricing causes the company to exceed the $10 million threshold in any rolling 12‑month period, the issuer must provide the enhanced Rule 701(e) disclosures—updated financial statements, risk factors, and a valuation-based description of the securities—on a timely basis to affected offerees before the repricing becomes effective.

Practical steps and documentation

A well-run repricing begins with a structured review of governing documents and a legal analysis of consent and approval requirements. Next, define the scope of changes.

If the company is making only a strike price adjustment, confirm unilateral authority. If changes extend beyond strike price, plan the consent process, consider tender offer principles, and prepare clear, consistent participant communications.

For any repricing, companies should:

• Establish the fair market value as of the effective date using a current 409A valuation.
• Update plan and award records to reflect new terms
• Align with accounting and tax advisors on ASC 718 modification accounting and ISO implications.
• Integrate country-specific guidance for non-US participants before launch and tailor materials as needed.

Conclusion

Private companies often have wide latitude to reprice options when market conditions undermine the value and retention power of outstanding awards. That flexibility does not eliminate the need for careful legal and tax analysis.

Focusing on governing documents, consent and tender offer considerations, cross-border issues, and ISO-specific consequences will help ensure the repricing achieves its business objectives while minimizing regulatory and dispute risk. Thoughtful planning, clear documentation, and coordinated execution across legal, tax, accounting, and HR functions are the hallmarks of a successful program.

For an overview of the strategic rationale and cost considerations behind private company option exchanges, see Part 1 of this series: Private Company Option Exchanges Guide - Overview & Costs.