Is backdating options OK after all?

So what's wrong with negotiating a contract that included stock options dated months before the contract negotiations even began? That, according to the WSJ, is apparently what Pixar's Steve Jobs was up to when he worked out a deal with animated director John Lasseter - and yes, it's that nasty backdating stuff. But perhaps it's backdating ... with an explanation. John Carney at DealBreaker.com says that Jobs may have known about the options grants and backdating, but he didn't know it was a bad thing to do. And so that makes it OK.

Let's go through this one more time. If we agree you should get $10 million in options today, and write that down at today's numbers of 10,000 shares, but the price jumps 10% by the time we finalize the agreement, you either better be on the ball and make sure you are getting 11,000 shares or you'll end up with less value than you negotiated for. If you're a busy executive, or say a film-director, you probably are doing more important things than watching the day to day fluctuations of the stock price. So odds are you are going to get screwed.

But if we fix the options grant at a certain date in the past, everyone knows exactly how many options equals how many dollars. We can all move on to thinking about more important things. As it happens, many companies were under the impression that accounting rules allowed them to account for these as "at the money" if they pegged these to earlier dates with historically low share prices, even though they were in fact granted on dates when they were "in the money." This turns out to have been wrong but it depends on an obscure, poorly understood and widely misunderstood, somewhat arbitrary accounting rule.

Here's what Carney suggests the Pixar-Disney people should say: "This isn't a big deal. Not because Jobs was too ignorant to understand it, but because it just isn't a big deal. We'll fix the financial statements. But nothing criminal or fraudulent happened here. Time to move on. Have we mentioned we're coming out with the iPhone?"