Earlier quoted context omitted.
To be perfectly honest, this bill affects mostly middle class near as I can tell. The following is entirely personal understanding of my own stock option agreement and is subject to mistakes and misconceptions...so someone can feel free to correct me. The problem this bill targets is the "exercise tax" interaction. Say you are an employee at a start up. Said start up can't afford your full normal salary so they pay y…
You have the gist right but a couple of corrections: 1) The board doesn't set the price arbitrarily. They engage a 3rd party accounting firm to do a 409A evaluation of the company. The 3rd party essentially sets the price. It's true that determining a market price for private company stock is just as much art as science but it's not completely arbitrary. 2) The company ABSOLUTELY CANNOT offer stock options at a disco…
Absolutely false. A company can create an option, a warrant, etc. with whatever kind of terms it likes, so long as the board approves and it's permitted by the applicable state law and charter.
The only thing a 409(a) valuation does is provide a "safe harbor" for the company and the employee, that allows them both to rely on the valuation as fair market value for tax & accounting purposes (for the company, so that it doesn't need to expense the option; for the employee, so that there's not an immediate taxable gain upon vesting).
The board, in fact, can make its own determination of fair market value without a 409(a) valuation. But if they do that, they blow their safe harbor and the burden of proof is on them if the IRS comes knocking. So no competent counsel is going to let you go around making up your own FMV.
Finally, I'm pretty sure that a board could even issue options that didn't even pretend to be at FMV, but were at some unconstrained number. There's very good reason, for example, to issue out-of-the-money options when you want people to have skin in the game. There's probably some conceivable reason to issue an in-the-money option, too. (If you do this, though, you are likely condemning both your company and your optionee to a pretty dark slog through the thickets of tax law.)
It is true that there were some criminal (and civil) sanctions tossed around for options shenanigans in the dot com 1.0 days, but they were mainly due to public companies blatantly back-dating options to specific days when the stock price was down, so as to provide guaranteed value to options recipients, without the company needing properly to account for the expense.