Repricing Underwater Options After a Down Round
After a down round the new appraisal often lands below the strike price on grants issued a year earlier, and every option in the plan is suddenly worth nothing to exercise. Underwater stock option repricing is the standard response, and it is more constrained than it sounds — the mechanics are governed by tax rules that treat a careless amendment as an entirely new grant.
Can a startup lower the strike price on options already granted?
Yes, but not casually. Repricing means amending or cancelling and regranting existing options, which requires board approval, a current valuation to price against, and care with the tax rules, because a modification can be treated as the grant of a new option.
- A modification can count as a new grant, restarting the relevant holding periods.
- Incentive stock options can lose their favourable status if repriced carelessly.
- An exchange programme needs a current 409A to set the new strike defensibly.
The three routes, and their costs
Amending the existing options is simplest on paper and most exposed to the modification rules. Cancelling and regranting resets the strike cleanly but restarts vesting expectations and, for incentive stock options, the holding periods that make them worth having. An exchange — options for fewer options at a lower strike, or for restricted stock — is the most defensible with employees because it is visibly a trade rather than a gift.
Whichever route, the new strike has to be priced off a current appraisal. The 409A valuation timing checklist covers whether the valuation you hold still supports a grant, and the ISO vs NSO tax calculator shows what the regranted options cost the holder at exercise under each instrument.
What to tell the team
Repricing is a retention exercise, and it fails if it reads as an accounting adjustment. Say what the old strike was, what the new one is, what changed in the valuation, and what the employee has to do — usually nothing. Lovie tracks each grant against the appraisal it was priced from, which makes a repricing a bulk action with an audit trail rather than fifty spreadsheet edits nobody can reconstruct later.
The modification rules themselves sit in 26 U.S. Code §424 on option modifications.