ShmoopTube

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Finance a la shmoop... what is back dating? ooh this is bad

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scandals, jail, Silicon Valley soap opera when an important employee is hired by a [Employee stood beside a start up company]

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young company they might get a generous option plan for a company stock in a

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more modest salary and bonus plan why because young companies don't have a lot

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of cash today but want to attract good workers and they're betting on the fact

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that employees will be tempted by the possibility of making millions from

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those options well there are usually some limits with the options for example

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the employee might have to stay in good standing at the company for four years

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and they must sell their options within ten years or so of them being granted so [Conditions for new employees]

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far so good but these options must also come with a strike price which is the

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price at which the employee can buy the stock and that's where things get sticky

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here with backdating well how is the strike price created well if a company's

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already publicly traded and them options are being granted that strike price is [Company handing out stock to public]

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usually derived by looking at the average closing price over the last 120

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days or so of trading or something like that some shady companies and employees

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realize that they could backdate their options which means slapping on a price

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from a date a few days a few weeks or a few months earlier when prices were way

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lower so instead of a strike price of like 20 bucks they might have a strike [Strike price comes down on a chart]

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price of like only 15 and have five free dollars of market ride on everyone

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else's nickel getting that lower price by fudging a few dates means bigger

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potential profits for the employees who will eventually then sell their stock [Pile of cash falling]

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and take the gain from whatever it sells for down to whatever the strike price

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was that they paid there's just one tiny problem with all this back dating is

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illegal in 2008-9 though it didn't prevent some big back dating scandals in

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Silicon Valley and put a few people in jail and since then laws have gotten a [Man behind bars and judge bangs gavel]

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whole lot stricter.... yachts n things stock was at 80 bucks a share 20 weeks

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ago now it's at 200 in four years it might be four hundred least that's what

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Morgan Stanley says it'll be the employee getting the $80 strike price on

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a hundred thousand shares will have appreciated $320 per share

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times 100,000 shares or 32 million dollars worth of appreciation that's a

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whole lot of appreciation but if the employee had received as their strike

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price the average of 280 those are the stock prices assuming an arithmetic set [Strike price highlighted]

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of closing price gains well then the strike price on their options would have

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been a hundred and forty not 80 the gain would then be only an appreciation of

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$260 not 320 it's a big difference when you multiply it by a hundred thousand

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right so yeah you don't want to miss out on that extra six million that's like a

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dozen of these bad boys [Yachts in a harbor]

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