Unvested Options exercised in error
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Has anyone ever had options exercised in error that were not vested due to a system error? How did you handle the accounting for this without busting the trade? What is all affected with such an error?
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Talk to legal, but generally, you need to bust the trade. I've never had a situation where we didn't have to bust the trade.
I don't know what the accounting would be if you didn't. I supposed you might be able to retroactively accelerate the vesting and just accelerate the corresponding expense, but then you'd have to do modification accounting and I've no idea how you'd come up with before and after expected terms in this situation. I supposed you could use a Monte Carlo simulation.
Ugh. So sorry you're having to deal with this. I'm surprised the system allowed the exercise!
Scotty C.,
It's unfortunate and unacceptable that the system allowed this exercise to happen in error. Not sure what system you're on, but there usually is a "require approval to exercise" checkbox. Make sure that's checked on all option grants. From an accounting standpoint, and you'll want to verify with your auditors, you likely will just need to reverse everything as if the exercise didn't happen. They may ding you on an internal control failure but you should be able to remediate it.
Now if somehow this was an early exercise, there could be a way around it without busting the trade. For starters, your plan doc and/or award agreement must have early exercise provisions. If not and this was just an option exercise that did not go through pre-clearance, I'm with Elizabeth that you have to get with legal and bust the trade. Hopefully this did not happen to a Section 16 Filer.
Hope this helps..
Bill Storey, CPA
Manager, Outsourcing Services
Stock & Option Solutions