A Pre-I.P.O. Gift to Company Executives: ‘11th-Hour Options Discounting’

Public companies must abide by strict rules when granting stock options to their top executives, including pricing them where the company’s shares are trading on the day they are granted and disclosing them swiftly.

Private companies planning to go public face some of the same requirements, but have more leeway in pricing their stock options — since there is no publicly traded price — and more time to disclose them.

That discrepancy has prompted dozens of private companies to give their top managers low-priced options in the weeks leading up to their initial public offering — when they can often accurately predict where their shares are likely to trade, but before public company regulations about options pricing kick in, according to a new research paper by Sven Riethmueller, a professor at Yale Law School.

“They just slide in these equity grants at the last minute,” said Mr. Riethmueller, referring to the options. He called the practice “11th-hour options discounting.”

In his paper, Mr. Riethmueller looked at 121 biotechnology companies heading toward an I.P.O. between 2017 and 2021. He found that 74 issued options to executives and employees in the 90 days before their public debut at an average discount of 48 percent of the I.P.O. price.

Zoom, Beyond Meat and Eventbrite were among companies that also granted cheap stock options to their top executives and employees before going public. Mr. Riethmueller pieced together his findings by combing through filings and obtaining nonpublic correspondence between the Securities and Exchange Commission and individual companies via the Freedom of Information Act.

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