One of the thornier issues which comes up in legal practice from time to time is the backdating of documents.Legally speaking, this is something that you should not do – or more accurately, there will only ever rarely be occasions when this is appropriate to do.Traditionally, stock option plans have been used as a way for companies to reward top management and "key" employees and link their interests with those of the company and other shareholders.
When we say “backdating” what we usually mean is executing a document and then dating it with an earlier date than the actual date of execution, with the intention that it should be treated as giving rise to legal rights before the actual date.
However, at common law this was a criminal offence (going by the contradictory sounding name of uttering a false document) and in most English law based legal systems it is still an offence today, although in many cases statutory provisions have superseded the common law (for example, in the British Virgin Islands see section 242 of the Criminal Code 1997).
As of 2014, the General Social Survey estimated that 7.2 employees held stock options, plus probably several hundred thousand employees who have other forms of individual equity.
That is down from its peak in 2001, however, when the number was about 30% higher.
In contrast to past practice, the Section 409A regulations (the final version of which was issued by the IRS in 2007) contained detailed guidelines for determining the fair market value of the common stock of a privately held company by requiring a “reasonable application of a reasonable valuation method”, including a few presumptively reasonable valuation methods or "Safe Harbors." These rules have reshaped private company common stock valuation and option pricing practices.
This article first briefly describes pre-Section 409A common stock valuation practices — the time-honored appropriate discount method.
The decline came largely as a result of changes in accounting rules and increased shareholder pressure to reduce dilution from equity awards in public companies.
A stock option gives an employee the right to buy a certain number of shares in the company at a fixed price for a certain number of years.
Larger, publicly traded companies such as Starbucks, Southwest Airlines, and Cisco now give stock options to most or all of their employees.
Many non-high tech, closely held companies are joining the ranks as well.
Under Section 409A, unless certain requirements are satisfied, amounts deferred under a nonqualified deferred compensation plan (as defined in the regulations) currently are includible in gross income unless such amounts are subject to a substantial risk of forfeiture.