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He pays the per share exercise price and can turn around and sell those shares on the exchange for each, netting a profit of per share, or ,000.
It would not be uncommon for there to be a lapse of days or even weeks between the time commercial terms are agreed and the date of final contract execution.
Even for a simple document such as a Non-Disclosure Agreement (or Confidentiality Agreement), the parties may legitimately want the document to take effect from an earlier date.
In our example, backdating the options is the same as giving John Doe a check for $35,000 -- without recording that $35,000 on the income statement as compensation.
That, in turn, understates the company's expenses and overstates its profits, which is a violation of generally accepted accounting principles and has been the grounds for a variety of fraud and miscellaneous charges from federal, state and local regulators.
Let's say that John now decides to exercise his stock options.