Ask HN: Company quietly did stock split, implications for options? | Hacker News Reader

Ask HN: Company quietly did stock split, implications for options?

Hey HN,

I was a software engineer at a US startup now considered a unicorn and recently in the news. It's got the right market, revenue and profit to have a liquidation event soon. I'm very concerned about a situation regarding my employee options and need advice on how to proceed.

I found out from friends higher up in the company that the company did something very quietly and I'm not sure exactly how to proceed. While still working there, between the time I started vesting options and the time I left the company they performed a stock split. I didn't notice this at the time but the options listed in the initial offer letter are the same as the number executed when I executed my options. It seems like they didn't follow through the stock split.

1. What do I do? 2. If the situation is as it seems, is there any legal recourse?

Thanks

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Read your company's stock option plan.

Most stock option plans have language that auto-adjusts all outstanding option awards in the same proportion as the stock split.

For example, if the company did a 1:5 stock split, your option award would also split 1:5.

So... if your company's stock option plan has this standard auto-adjust language, a stock split is likely a non-issue.

After seeing a few of these comments, I think I'll clarify.

I'm aware of how stock options should work under stock splits. As others have said, in general, whether it's options or shares, the equity on each side of the split should remain constant. IE 3x the shares, 1/3 the value. In the case of options 3x the options, 1/3 the strike price.

My issue is that it's clear that the option amount did not auto-adjust. I've already executed the options. The kicker is, neither did the strike price. It looks like not only did I not get the number of shares from the options I vested when executing them, I overpaid for the ones I did get since the value didn't change. This likely means they're underwater and worth zero.

I guess my next step is to contact their law firm and see if I can get confirmation from them about the split, then I can push them to correct it. (through legal means if necessary)

Stock splits seem to be something that for some reason reasonably smart engineers view as some type of financial scam. A split is simply a way of re-arranging the equity - a split in itself neither creates, nor destroys value.

I've tried over the years to come up with a decent analogy and this is the best I can do. Imagine your options are cartons of eggs, and you have 5 cartons. A carton of eggs is worth $2. You have $10 worth of eggs. However the people that decide how eggs are sold determine that eggs should be sold in bundles of 6 for $1 each. You cut the cartons in half. You now have 10 cartons of eggs, still worth $10.

This was not in done in secret in some kind of way to scam you. Unless there are different stock classes, this will impact every investor. You should probably contact the company holding the options, Merrill, Fidelity, etc, and confirm that it will be updated.

If it's publically traded, yeah, nothing nefarious happened. But if it's private, all bets are off. Often, options there are nothing more than a couple of pages of paper tracked by the company itself. It may very well require legal advice to unwind what happened.

I went through this in the past and my options auto updated and exercising them was not a problem (1/x) price per share for (n*x) options.

IANAL but I don't believe the company could legally split stock without your options being affected, because they're materially changing the promise of what you are owed. Also your options have real impact even before you exercise them, because you can do things like pay the taxes early. If you did this and the value materially changed, it wouldn't line up.

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