NSO to ISO - Vesting Question

Question

We have a client with an optionee that was initially brought on as a consultant. He was granted an NSO at that time with a vesting start date that aligned with his true start date. He has since transitioned into a full-time W2 employee. The Board now wants to cancel the existing NSO and grant a new 'replacement' ISO with the same vesting schedule and vesting start date. Are there any issues with this? He has continued service since he started, no interruptions. He understands that the grant date would change (and the clock would start on the ISO holding period based on that new grant date)

Answer

Hi Teresa-Judith,

As a quick disclaimer, this is not legal advice but general thoughts to hopefully guide your analysis. A vesting schedule is a discretionary tool used by Boards to help ensure they are only giving away equity to loyal employees. Therefore, if I were to join a startup tomorrow and negotiate a two-year vesting schedule, vesting monthly, that should result in the same vesting as if I were on a four-year vesting schedule with a vesting commencement date of October 1, 2021. Thus, backdating the vesting on a new grant is permissible. As you've acknowledged, there are other implications to this around his holding period, and if the strike price is different today than it was when the NSO was granted, that could also impact the new grant. Furthermore, if the new ISO grant had an early exercise opportunity, that could result in an 83(b) election needing to be filed. I hope that helps guide the conversation and feel free to contact me directly at alex@archetypelegal.com if I can further assist.

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