Option modification is a change to outstanding stock options after the original grant date. Modifications include repricing, exchange programs, extending the exercise term or post-termination exercise window, and accelerating vesting, with significant consequences including potential ISO disqualification (modifications can be treated as new grants under Section 422), 409A penalty exposure, and incremental accounting expense. It is one of the most-mishandled areas of equity-comp administration and a common source of tax and accounting problems at companies that don't get specialized advice.
The main types of option modifications:
Repricing: lowering the strike price of outstanding options to current FMV. Used when the com...