Accounting Principles

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

a hundred thousand shares will have appreciated $320 per share

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

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

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

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

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

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

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

dozen of these bad boys [Yachts in a harbor]