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What is the rationale behind using non‑qualified stock options rather than other equity awards?

Created August 06, 2025 at 07:51 PM

Why Viridian Therapeutics chose non‑qualified stock options (NSOs) instead of other equity awards

Viridian’s press release tells us that the company’s Compensation Committee—made up entirely of independent directors—approved a grant of non‑qualified stock options (NSOs) to four new employees, covering an aggregate of 181,450 shares of common stock. While the filing does not spell out the company’s strategic thinking, the choice of NSOs over other equity‑award types (e.g., incentive‑stock options, restricted‑stock units, or performance‑share awards) is usually driven by a combination of practical, tax‑ and market‑considerations that line up with the company’s goals at this stage of its growth. Below are the most common rationales, and how each fits Viridian’s situation as inferred from the news:

1. Flexibility in Granting and Exercising

Feature	NSOs	Other Awards (e.g., ISOs, RSUs)
Who can receive them	Employees, consultants, directors, and non‑employees alike.	ISOs are limited to employees only; RSUs can be granted to non‑employees but often require more complex vesting structures.
Exercise mechanics	Option holder can choose when to exercise (subject to vesting), paying cash for the shares at the pre‑set strike price.	RSUs are automatically converted to shares (or cash) at vesting—no decision point for the recipient.
Rationale for Viridian	The company is onboarding new talent (four new employees) and likely wants a tool that can be tailored to each individual’s compensation profile, career stage, and cash‑flow preferences. NSOs let the company set strike prices that reflect the fair market value at grant, while still giving the employee the freedom to time the exercise for optimal personal tax planning.

2. Tax Treatment – Company’s Cash‑Flow Management

Aspect	NSOs	ISOs / RSUs
Company’s tax deduction	Deduction is taken at the time of exercise (the spread between strike price and FMV). This means the company can offset the deduction against its own taxable income when the employee actually exercises.	ISOs generate no regular tax deduction at exercise (only a potential AMT adjustment); RSUs generate a deduction at vesting (which may be earlier than the employee’s cash‑out).
Cash‑flow impact	Because the deduction is deferred until exercise, the company does not need to front‑load a large tax expense.	RSU vesting can create a sizable deduction all at once, potentially straining the company’s tax‑planning if the vesting schedule is front‑loaded.
Rationale for Viridian	As a biopharmaceutical firm still in the growth‑phase, Viridian likely wants to avoid a sudden, large tax deduction that could complicate its own earnings forecasts. NSOs let the company align the tax deduction with the actual cash‑out (exercise) by the employee, smoothing the expense over time.

3. Alignment of Long‑Term Shareholder Interests

Incentive to increase share price: NSOs only have value if the company’s stock price rises above the strike price. This creates a direct, long‑term upside for the employee that is tied to shareholder wealth creation—precisely the “best‑in‑class medicines” growth story Viridian is pursuing.
Retention & performance: By setting a vesting schedule (often 3‑4 years) and a strike price at the current fair market value, NSOs encourage employees to stay and help drive the stock price upward, because the benefit is realized only after the options are exercised.

4. Regulatory & Listing‑Rule Compatibility

Nasdaq Listing Rule 5635(c)(4): This rule governs the grant of inducement awards to new employees and directors. Using NSOs can be a straightforward way to comply because:
- The strike price can be set at the fair market value on the grant date, satisfying the “no discount” requirement.
- NSOs are a standard, well‑understood instrument for inducement grants, making the filing and disclosure process simpler under Nasdaq’s rules.
Simpler accounting and reporting: NSOs are accounted for under ASC 718 (share‑based compensation) with a clear methodology for estimating fair value (e.g., Black‑Scholes). This reduces the complexity of the company’s financial‑statement disclosures compared with performance‑share awards that may require additional performance‑measurement and valuation steps.

5. Cost‑Effectiveness for the Company

No mandatory cash outlay at grant: Unlike RSUs, which often require the company to set aside cash or shares to fund the eventual payout, NSOs impose no immediate cash or share‑based expense. The company only needs to issue shares when the employee exercises, which can be timed to coincide with liquidity events (e.g., a financing round or a public offering) that already provide the necessary cash or dilution.
Lower administrative burden: NSOs are a single‑document instrument (option agreement) with a straightforward exercise‑price schedule. RSUs, especially those with performance conditions, need more complex tracking, performance‑measurement systems, and potentially third‑party administration.

6. Targeted Use for New Hires vs. Existing Executives

The news specifically mentions “4 new employees.” For brand‑new hires, NSOs are often the go‑to inducement because:
- They can be tailored (different strike prices, vesting periods) to match each employee’s seniority and expected contribution.
- They provide a clear upside that can be communicated during recruitment (“you’ll have the opportunity to purchase shares at today’s price and benefit if the company’s value grows”).

7. Potential Future Flexibility for the Company

Convertible to other forms later: If Viridian’s compensation philosophy evolves, NSOs can later be exchanged for other equity awards (e.g., RSUs) or be re‑granted under a different plan without needing a brand‑new board approval, giving the board flexibility as the company matures.
Retention of control: NSOs do not confer voting rights until exercised, which means the company retains tighter control over its capital‑structure in the early years, a consideration for a firm that may still be navigating financing rounds and strategic partnerships.

Putting It All Together

Viridian Therapeutics’ decision to grant non‑qualified stock options to its four new employees is likely driven by a blend of the following strategic rationales:

Flexibility to tailor awards to a diverse set of new hires and to let employees decide when to exercise, aligning personal cash‑flow planning with company performance.
Tax‑efficiency for both the company and the employee—deferring the company’s deduction until exercise and allowing the employee to manage ordinary‑income tax on the spread.
Shareholder‑alignment—NSOs only have value when the stock price exceeds the strike price, directly incentivizing employees to help grow the company’s market value.
Regulatory simplicity—NSOs meet Nasdaq’s inducement‑grant requirements under Listing Rule 5635(c)(4) with straightforward pricing and reporting.
Cost‑effectiveness—no immediate cash outlay or dilution at grant, lower administrative overhead, and the ability to synchronize exercise with future liquidity events.
Targeted recruitment tool—provides a compelling upside for new talent while keeping the company’s capital‑structure manageable.

In short, non‑qualified stock options give Viridian a versatile, tax‑advantaged, and shareholder‑centric instrument that fits the company’s current growth stage, its need to attract and retain key talent, and the compliance framework of Nasdaq’s listing rules.