Stock option schemes in times of COVID-19

The corona crisis has an unprecedented impact on our society. Now that urgent operational issues have been taken care of, it is time to address to more strategic questions. We can comment on 2 challenges and opportunities as to stock option schemes: 

1. The end term of our stock option scheme is approaching. However, due to the COVID-19 pandemic, the value of the underlying shares has decreased (materially), resulting in the stock options being “under water”, meaning it is currently not interesting to exercise the stock options. What can we do?

A first possibility is to extend the exercise period of the stock options. Depending on the significance of the decrease of stock value, however, such an extension, potentially, needs to be for a longer period in order for the underlying stock to be able to move in-the-money.

Another solution could be reducing the exercise price. However, be aware that both of these possibilities may have an impact from a tax perspective if the stock options were taxed at grant.

A third option is to compensate the beneficiaries for the taxes paid at “grant” (if applicable) in order to neutralize the financial loss. Note that under certain conditions, it is possible to do so in a tax friendly manner.

2. Considering the COVID-19 pandemic, is it interesting to introduce a stock option scheme within my (management) company now?

The gain which could result from stock option schemes depends on several factors such as the company’s growth expectations, market trends, geopolitical events, …
Due to the COVID-19 pandemic, many public as well as private companies are faced with a (substantial) decrease of their share value.

Therefore, it could be interesting to introduce a stock option scheme now, before the stock market revives. Indeed, such stock options not only provide the beneficiaries the opportunity to profit from the lower exercise price compared to the issuance of a stock option scheme under “normal” conditions. It also provides an incentive mechanism, which could result in a faster recovery of the company.

However, the option value is expected to move in the opposite direction of the stock value in current circumstances. Volatility of the underlying stock is one of the key inputs to determine the fair value of an option next to the exercise and current price of the underlying stock as well as the life of the option. Due to an increase of (expected) volatility, the option value increases as well.

Hence, although the option cost might increase due to an increase in volatility, current market conditions provide an opportunity to establish a stock option scheme as stock value decreased significantly.

Please don't hesitate to contact one of the authors of this article should you need more information or specific assistance in connection with stock option schemes in times of Covid-19.

Senior Associate
Senior Manager