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What is a Reprice?

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  • Written By: Mary McMahon
  • Edited By: Kristen Osborne
  • Last Modified Date: 29 November 2016
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    Conjecture Corporation
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A reprice is an option, usually offered to executives and upper level management of a company, allowing people to exchange old stock options for newer, more valuable options when the value of the company's stock falls. Repricing is intended to create an incentive to stay loyal to the company even as stock values fall. Companies must report the transaction along with other financial disclosures, and it is considered a form of employee benefit. This practice is sometimes criticized as a reward for executives of a failing company, as they get valuable stock options when the company's value drops.

Employee stock options carry the right, but not the obligation, to purchase stock in the company people work for. When the value of a company falls, these options are said to be out of the money, because the price offered in the option is higher than the current market value of the company's stock. Out of the money employee stock options are effectively worthless, as there would be no reason to exercise the option when stock can be bought more cheaply on the open market.

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When this situation arises, the company may offer a reprice. Employees can trade their out of the money options in for new options said to be at the money, valued in accordance with the company's current value. These options are worth more and are more valuable for employees. A reprice is usually offered to upper level executives to keep them loyal to the company during a rocky financial period, giving them a reason to keep working for the company instead of seeking employment elsewhere.

When a reprice is offered, details will be circulated to people eligible for the offer. There is usually no reason to decline a reprice, as it allows people to trade worthless employee stock options in for more valuable ones. Once the exchange is processed, the company reports it, and employees may also be required to report it as a form of compensation, as they received something of value in the transaction. Accountants can provide more information about how to handle the reporting of a reprice on taxes and other financial disclosures.

Critics of reprice opportunities argue that they allow people at the helm of a failing company to wring more value out of it, and can serve as a reward for allowing a company's value to fall. People allowed to exchange their stock options are, however, banking on a rise in the company's fortune that will make their options more valuable by allowing them to purchase stock at a low price and resell it at a much higher one. Holding these options is an incentive to improve company performance and generate more of a profit in the future.

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