He pays the per share exercise price and can turn around and sell those shares on the exchange for each, netting a profit of per share, or ,000.
Granting stock options to employees is a generally accepted and perfectly legal form of compensating employees. Critics of backdating argue that the practice is difficult to detect and thus encourages boards and executives to use it to synthesize more creative compensation packages.
All stemming from the practice known as “options backdating.” Options backdating occurs when a company issues stock options on one date, but reports in its financials an earlier issue date to create a “strike” or exercise price equal to the earlier date’s lower price.
In our example, backdating the options is the same as giving John Doe a check for ,000 -- without recording that ,000 on the within two business days.
In addition to being illegal, backdating isn't always a sure thing.
The practice sometimes also occurs in the insurance industry, whereby policy issuers make the effective date of a policy (or claim) earlier than the application date in order to obtain a lower premium for the customer (or obtain better claim results). When he was hired, the Company XYZ board of directors offered John an attractive salary as well as an annual grant of 1,000 Company XYZ stock options.
Those options give John the right but not the on the date of the grant.
Kwall of Loyola University of Chicago’s law school in an article on the subject.