I've been working at a startup for a few months and was granted stock options as part of my compensation package. The company is not public. The grant has been approved by the board and has already been issued.
Last week I received an email from the CEO who wrote that an independent valuation was done on the company to determine the fair market value of its common stock, which is subsequently used for setting the exercise price assigned to options. The valuation report indicated that all stocks options issued after a specific date earlier this year should have been valued 2.7 times higher per share (the FMV is still measured in cents, not dollars, so isn't that huge of a jump). The email was sent to all employees who were issued stock options that "should" have been granted with a higher strike price (everyone was on the BCC: line, so I don't know specifically who this effects but I can guess because I know who was hired in this time frame).
The letter stated that the board recently approved options at the lower price per share which "would put you and the company at risk of tax issues with IRS in the future if left unattended."
Given this, the Board wants to terminate the option recently granted and issue a new grant with the higher pricer per share. The number of shares in the new grant will be increased by 27% to makeup for the difference in value.
This sort of rubs me the wrong way. Part of me thinks that I like my job a lot and my salary is good so I should just go along with it. Part of me feels like the Company/Board screwed up and they're changing the terms of my compensation, which I don't think is cool. I'm not sure what questions to ask of the CEO/company.
What could the tax issues with the IRS be? I thought (but not totally certain) that the tax treatment of an ISO option was based on difference between exercise price and FMV at the time of the sale.
What should I take into consideration to determine whether a 27% increase in shares is a fair exchange for an increase in 270% increase in strike price.