Getting that lower price by fudging a few dates means bigger potential profits for the employees who will eventually sell the stock. In 20, though, it didn't prevent some big backdating scandals in Silicon Valley.
So far so good, but these options must also come with a strike price, which is the price at which the employee can buy the stock. Some shady companies (and employees) realized that they could backdate their options, which means slapping on a price from a date a few days, a few weeks, or a few months earlier (when prices were lower).
There is no statute that explicitly outlaws backdating stock-option grants, but it seems virtually impossible to backdate options and achieve the ultimate goal of putting grants “in the money” without first deliberately falsifying documents and then covering up the sham.
At least that seems to be the conclusion reached by the Department of Justice and the Securities and Exchange Commission regarding their first case against executives charged with fraud related to backdating.
When an important employee is hired by a young company, they might get a generous option plan for company stock and a more modest salary and bonuses. Because young companies don't have a lot of cash now but want to attract good workers, and they're betting on the fact that employees will be tempted by the possibilities of those options. For example, the employee might have to stay in good standing at the company for 4 years and must sell their options within 10 years or so of them being granted. Usually by looking at the average closing price over the last 120 days of trading or something like that.
Meaning: In the context of mutual funds, a feature allowing fundholders to use an earlier date on a letter of intent to invest in a mutual fund in exchange for a reduced sales charge, e.g.
That concealed the additional executive pay and overstated financial results.
Historically, practicing backdating was possible because reporting the issuance of employee stock options to concerned authorities (such as the SEC) was allowed to take place within a relatively long period of time (two months) after the actual grant date.
That means, setting the exercise price of the option lower than the firm’s stock price at the date of grant.