An option with a reload feature is one that provides for automatic grants of additional options whenever an employee exercises previously granted options using shares of stock, rather than cash, to satisfy the exercise price. At the time of exercise using shares, the employee is automatically granted a new (or reload) option.
The possibility to reload an option increases its value compared with an otherwise identical option that cannot be reloaded. The holder of an option with a reload feature benefits since he may exercise existing options to lock in a gain and still participate in future potential gains. The optimal time to exercise the original option and the value of the reload feature depend on certain key terms of the option reload provision: (i) the number of times the option may be reloaded, (ii) the minimum time that must elapse between exercises, and (iii) the number of new options granted for each option exercised.
A reload feature is a provision that stipulates new options are granted to an executive at the time the executive exercises the original options. The reload options typically have an exercise price equal to the then-current market price and expire at the same time as the original options. The number of reload options granted per option exercised varies by firm. Commonly, a reload option is granted for each share tendered by the executive in payment of the exercise price on the original options. All other terms of the reload option, such as expiration date and vesting schedule, are the same as the terms of the previous option.
Sometimes the new options themselves may be reloaded. Hence, a comprehensive valuation procedure requires that both the number of reloads allowed and the number of options granted per existing option exercised be taken into account. The procedure must also anticipate that a reload feature affects the timing of exercise of the initial option. The Black-Scholes formula cannot provide an accurate measure of the value of a reload feature since it neither anticipates optimal early exercise nor assigns value to the reloaded options.