What are the implications for employee shareholders in the event of a reverse stock split at a pre-IPO company? i.e. employee shares go from 500 shares to 200 shares.

orig. post on Quora

Dan Walter’s Answer

If  the company does a reverse split (the number of outstanding shares is  reduced and the stock price is increased) then the strike price of  options will usually go up accordingly.  This is very common when a  company does an IPO.  Often it is required to get the publicly tradeable  stock to a price range that is consistent with a typical offering.  For  example imagine you have 50,000,000 outstanding shares and your value  is $150M.  Your stock price would be $3. But, you would need that price  to be $15-30 for a typical IPO.  With a value of $150M you would need to  have only 10,000,000 shares outstanding to have a “per share” price of  $15.  So you would do a reverse stock split and everything associated  with the price, including historical grant prices, would also change.