This 'grant' price business is nonsense. If one owns an option, whether he bought it or a company granted it to him, then he can buy shares at a KNOWN price within some period of time if he wishes to do so. What you call the 'grant' price SEEMS (and your explanation is needlessly prolix) to be simply a striking price, i.e. the price of exercise on demand.
What you call the 'exercise price, the FMV of the shares on the day of exercise' is no such thing. If your 'grant' price is 30, and the shares rise to 50, you would have it that the 'exercise price' is 50. It is not, it is exactly 30.
I'm not concerned, not ever have been during this discussion, with tax consequences. Obviously, the IRS impute tax liability on the day and at the market price of the shares when the option is exercised, and clearly, as everyone on this thread (with any sense) has stated, when someone exercises a privately granted option, they're idiots if they don't at least sell as many shares as necessary to pay the tax bill, that day. What they do with the remaining shares is irrelevant to this discussion.
BTW, and merely for your convenience, and not waving a red flag at you, I bought my first membership on CBOE in April 1974, and have traded options there since. This notion of 'three prices' is bizarre, to say the least. A call option, ANY call option, any flavour, allows the owner to buy a specific amount of something at a specific price, on or before a specific date, subject to any conditions that may be specified by the grantor. If the grantor is a company, obviously they can include any restrictions they like, but, no matter the conditions, the definition of 'option' does not change. Perhaps, in support of your argument, these companies are actually granting something else, a non-recourse warrant, say, but if they are in fact granting options, then the definition of the instrument is inarguable.
If you disagree, fine, I've no quarrel, and I certainly hope you trade listed stock and futures options. If not, please distinguish SHARPLY between this mystical 'grant' price and the equally curious notion of 'exercise' price.
A fascinating thread, I've learned some things (not necessarily those you might think, btw).
FRegards!
This 'grant' price business is nonsense. If one owns an option, whether he bought it or a company granted it to him, then he can buy shares at a KNOWN price within some period of time if he wishes to do so.
False. The ISO or NQSO option is not owned. It can not be traded or assigned. It is only a right to exercise as per a future vesting schedule subject to additional T's & C's. You can not buy or sell shares (under the option) when you wish at any price. You can only buy those shares which have vested and only at the fixed grant price written into the 'option' agreement when the 'option' was granted to the employee (usually within 1-3 months after being hired).
What you call the 'exercise price, the FMV of the shares on the day of exercise' is no such thing. If your 'grant' price is 30, and the shares rise to 50, you would have it that the 'exercise price' is 50.
False. The grant price is the price the employee must pay to exercise the option and own the vested shares ($30 in your example). This is the way ISO's and NQSO's work. This is not a CBOE option. The employee cares aout the FMV on the day of exercise because the spread bewteen the grant price and the exercise price determines the tax liability and withholding in the case of an NQSO. Yes! taxes are withheld immediately and concurrently with the exercise for the NQSO, or gain recognized for an ISO.
when someone exercises a privately granted option, they're idiots if they don't at least sell as many shares as necessary to pay the tax bill, that day.
You assume taxes are due. In the case of ISO's, they are not. In the case of underwater ISO's or NQSO's they are not. Only in the case NQSO's with a gain are taxes withheld, and whether one chooses to pay the taxes with cash or sell shares is a another analysis.
This notion of 'three prices' is bizarre, to say the least. A call option, ANY call option, any flavour, allows the owner to buy a specific amount of something at a specific price, on or before a specific date, subject to any conditions that may be specified by the grantor. If the grantor is a company, obviously they can include any restrictions they like, but, no matter the conditions, the definition of 'option' does not change. Perhaps, in support of your argument, these companies are actually granting something else, a non-recourse warrant, say, but if they are in fact granting options, then the definition of the instrument is inarguable.
Irrelevent to ISO and NQSO's. They are not traded on the CBOE and the are not public traded options. ISO's and NQSO's are entirely different.