Yes. A private company’s board can lower the exercise price of outstanding stock options to the current 409A value. This is called a repricing. A simple repricing that only lowers the price usually doesn’t need option holders’ consent, but one that also changes vesting or the number of shares usually does, and it can bring in the SEC’s tender offer rules. Before doing either, decide whether a repricing is worth it: it shifts future value from founders and investors to option holders, restarts ISO holding periods and can signal trouble.
Key takeaways
- An option is underwater when its exercise price is higher than the current fair market value of the stock.
- Repricing moves value from other stockholders to option holders. New grants at today’s price, or doing nothing, are real alternatives.
- A simple repricing needs board approval and a new price at least equal to the current 409A, and usually no holder consent.
- A repricing that also changes vesting or share counts needs holder consent and usually tender offer compliance: open at least 20 business days, and for ISOs, less than 30 calendar days.
- Repriced ISOs are treated as new grants, so holding periods restart and the $100,000 limit is recalculated. Repriced options also count as new grants under Rule 701.
What does “underwater” mean, and why does it matter?
Options are priced at the fair market value of common stock on the day they’re granted. If the company’s value falls, usually after a down round or a flat round with heavier preferences, the next 409A valuation comes in lower. Options granted at the old price are now “underwater”: the holder would pay more to exercise than the shares are worth.
That hurts in three ways. Employees see little value in their equity and are easier to recruit away. New hires get options at the lower price, so they can be better off than the people who took more risk joining earlier. And the equity stops doing its job as a retention tool. See What Is a Down Round?
Should we reprice at all?
Start with who pays. Lowering exercise prices means option holders receive more of the proceeds in a future sale, and founders and investors receive correspondingly less. That trade can be worth it if it keeps the team that will build the company’s value back, but it’s a real cost.
Example. An employee holds 50,000 ISOs granted in 2024 at $2.00 per share. After a 2026 down round, the new 409A value is $0.80. If the company sells for $1.50 per common share, the options are worth nothing at $2.00. Repriced to $0.80, they’re worth $0.70 each, or $35,000. Across 40 employees holding 1,200,000 underwater options, a repricing moves about $840,000 of sale proceeds at that price to option holders, away from founders and investors.
Then consider the signal. A repricing tells employees and future investors that the value fell, which they may already know, but it makes the point official. Think about whether the value may fall further, because a second repricing is worse than the first. And look at how far underwater the options are. If the old price is close to the current value, waiting may be enough.
| Option | What it does | Holder consent? | Main trade-off |
| Simple repricing | Lowers the exercise price, nothing else changes | Usually not, but check the plan | Value moves to option holders immediately |
| Repricing with new terms (an exchange) | Lower price in return for new vesting, fewer shares or both | Yes, and tender offer rules usually apply | More process, but a fairer trade for other stockholders |
| New grants at today’s price | Adds options on top of the underwater ones | No | More dilution and more of the pool used |
| Do nothing | Keeps the old options in place | No | Retention risk if the gap is large |
What’s the difference between a simple repricing and a repricing with new terms?
A simple repricing lowers the exercise price and leaves everything else alone: the same shares, the same vesting, the same expiration date. For NSOs it usually only helps the holder, so it often doesn’t need their consent. For ISOs, a repricing restarts the holding periods and can turn some options into NSOs, so many companies ask ISO holders to choose, which can bring in the tender offer rules described below. Check your equity incentive plan first, because some plans prohibit repricing without stockholder approval.
A repricing with new terms asks something in return. Holders might accept restarted or extended vesting, or fewer options, in exchange for the lower price. Because holders give up rights, they have to agree, and asking each of them to decide is generally treated as a tender offer under SEC rules. That means a written offer document explaining the terms and risks, and an offer that stays open for at least 20 business days. For ISOs, there’s a second clock: if an offer to change ISO terms stays open for 30 days or more, the ISOs are treated as modified even for holders who say no. So the offer window needs to be at least 20 business days but less than 30 calendar days. In April 2026 the SEC allowed a shorter 10-business-day period for some tender offers, but that relief is limited to company self-tenders for cash and doesn’t cover repricings or option exchanges.
What are the tax rules for a repricing?
A repricing is generally not a taxable event for option holders, but it is treated as a new grant for tax purposes, which has three effects.
The new price must be at least fair market value. Under Section 409A, the new exercise price can’t be lower than the fair market value on the repricing date. Get a current 409A valuation before the board acts. See 409A Valuation.
ISO holding periods restart. To get ISO tax treatment, shares must be held at least two years from grant and one year from exercise. A repriced ISO has a new grant date, so the two-year clock starts over.
The ISO $100,000 limit is recalculated. Only $100,000 worth of ISOs, measured at grant, can first become exercisable for an employee in a year. Because a repricing creates a new grant, some holders may end up with part of their options treated as NSOs. See NSO vs ISO.
Holders outside the US are subject to local tax, securities and employment rules, so get local advice before including them. Former employees are usually excluded, and most plans don’t allow them to participate. Option holders should talk to their own tax advisor.
What about securities law and accounting?
Most private companies grant options under Rule 701, an exemption under the Securities Act of 1933. Under the SEC staff’s current guidance, a repriced option counts as a new sale on the repricing date, at the new exercise price, when testing Rule 701’s 12-month limits and the $10,000,000 threshold for extra disclosure. If the original grant was made within the previous 12 months, the company can drop the original grant from the count. Large repricings can push a company over the threshold, so run the numbers first.
For accounting, a repricing is a modification of the award, which usually means recognizing additional compensation expense. Talk to your accountants before the board approves anything.
Who needs to approve a repricing?
The board, or a committee it authorizes, must approve it. The resolution should explain why the repricing is in the best interests of the company and its stockholders, identify which options and holders are eligible, set the new price by reference to the current 409A, and approve any changes to vesting or share counts. Stockholder approval generally isn’t required unless the plan, the charter or an investor agreement says so, so check all three. See What Does My Startup’s Board of Directors Need to Approve?
If directors or executives hold options being repriced, they have a personal interest in the decision. Have disinterested directors approve it, or get stockholder approval. See Fiduciary Duties of Startup Founders.
How do we run a repricing?
- Get a current 409A valuation.
- Decide which holders and which options are eligible, for example only current employees and only options above a set price.
- Choose a simple repricing or an exchange with new terms.
- Model the value moved to option holders, the ISO limits, the Rule 701 totals and the accounting expense.
- Check the plan, charter and investor agreements for required consents.
- Get board approval, and for an exchange, prepare tender offer documents with a 20-business-day to 29-day window.
- Send each holder an amended grant notice showing the new price and any ISO or NSO change, and update the cap table.
For early-stage companies that do decide to reprice, a simple repricing of current employees’ options is usually the cleanest choice. An exchange makes more sense when the repricing is large enough that investors want something in return.
For more, see Stock Options, Employee Stock Option Plan and Equity Dilution.
If you’re considering a repricing, see our General Counsel service or contact us.
