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What is a Reload Feature?

Reload Feature

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Reload Feature

A “reload feature” typically refers to stock option plans. In such plans, when an employee exercises a stock option using already owned shares of the company’s stock (a practice known as a “stock swap” or “stock-for-stock exercise”), the employee receives not only the new shares associated with the exercised option but also an additional grant (or “reload”) of new options. These new options typically replace the number of old shares used in the stock-for-stock exercise.

The reload options generally have:

  • A new grant date, which is typically the date on which the original options were exercised.
  • A new exercise price, which is usually set to the market price of the stock on the grant date of the reload option.
  • A new vesting schedule.

The reload feature was more popular in the past but has become less common in recent years due to changes in accounting treatments and potential governance concerns.

Example of a Reload Feature

Let’s illustrate the reload feature with a fictional example.

Example: Reload Feature in Action at TechNova Corp.

Background: TechNova Corp., a growing tech company, has a stock option plan for its employees. To encourage long-term commitment and align employee interests with shareholders, the company’s stock options come with a reload feature.

Scenario: Steve, a senior developer at TechNova, was granted 2,000 stock options five years ago at an exercise price of $25 per share. The current market price of TechNova’s shares has risen to $50. Steve decides to exercise 1,000 of his options.

To finance the exercise without an out-of-pocket expense, Steve uses a stock-for-stock exercise method. He already owns 500 shares of TechNova that he bought three years ago at $20 per share.

Transaction Breakdown:

  • Stock Option Exercise:
    • Steve’s 1,000 options allow him to purchase shares at $25 each.
    • Total cost for 1,000 shares at the exercise price = 1,000 x $25 = $25,000
  • Stock-for-Stock Financing:
    • Steve’s 500 owned shares are currently worth = 500 x $50 (current market price) = $25,000
    • Steve surrenders these 500 shares to cover the cost of exercising his options.
  • Outcome:
    • Steve now has 1,000 new shares of TechNova, acquired at the exercise price.
    • The 500 shares he owned and used for the exercise are returned to the company.
  • Reload Feature Activation:
    • Because of the reload feature in his stock option plan, Steve is granted new options equivalent to the number of shares he used for the stock-for-stock exercise, which is 500 shares.
    • These new reload options have an exercise price set at the current market price: $50.
    • They come with their vesting schedule, say over the next three years.

Implications: The reload feature has effectively incentivized Steve to stay engaged with TechNova. Even after exercising a portion of his original options, he now has a new set of 500 options, offering potential upside if the company continues to perform well.

While this scenario paints a clear picture of how reload features work, it’s essential to understand that real-world stock option plans can be more complex and subject to various rules and regulations. As mentioned previously, the use of reload features has decreased due to changes in accounting rules and governance concerns. Still, the example provides insight into the mechanism and intent behind such a feature.

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