Explain option splits

[slinkp]

When my company had a series B, our existing options were split - I believe this is done to make a larger pool of shares? Don't really know. The total of exercise price times number of options stayed the same, it was just more shares at a lower price.

It would be great to say something about how such splits work - why they happen, and how they can affect the employee. When it happened here, I remember talking to some people about it and we all basically ignored it, thinking that the total product was the same, therefore nothing had really changed. We were thinking about it like this:

              Shares  Exercise price  Total exercise cost
pre-split      1,000           $1.00                $1000
post-split    10,000           $0.10                $1000

But at the same time, while the FMV per share went down, it didn't go down by anywhere near the same ratio - the total valuation of the company was higher. That sounds great - we have options in a more valuable company, yay! Except that after talking to a tax professional, I found out that the theoretical net gain, of (FMV - exercise) * shares, is used for AMT calculation. So the cost of exercising the day after the series B was a lot higher than the day before the series B. Ouch.
Something like this:

              Shares  Exercise price  Total cost  FMV/share   Net gain for tax calculation
pre-split      1,000           $1.00       $1000      $2.00                         $1,000
post-split    10,000           $0.10       $1000      $1.00                         $9,000

[jlevy]

Good suggestion. Thanks for sharing. Open to contributions here!

[jlevy]

Topics we should cover would include

• definition of a stock split and common reasons for it
• how this affects existing option and stock holders
• other issues to be aware of with stock splits

If I understand your scenario correctly, however, it wasn't really the stock split that surprised you -- it was just the usual fact that increases in FMV can mean higher taxes at time of exercise. (Which I hope is already covered clearly.)

[slinkp]

Yes, I think I was conflating two things there. The split per se did not affect the tax calculation. It's just that it coincided with an adjustment of FMV, which was driven not by the split but by the series B.