Repricing Employee Options
Hi everyone,
I had a question about repricing employee stock options, here it is,
5. Patriot Corp. compensates executives with 10-year European call options which is granted at-the-money. If there is a significant drop in the share price, the company’s board will reset the strike price of the options to equal the new share price. Then, the maturity of the repriced option will equal the remaining maturity of the original option. Suppose σ = 30%, r = 6%, δ = 0, and the original share price is $100. Calculate the following:
a. the value at grant of an option that will not be repriced
b. the value at grant of an option that is repriced when the share price reaches $60
c. the repricing trigger that maximizes the initial value of the option
Pricing Employee Stock Options (Originally Posted: 01/06/2015)
Monkeys,
I am curious to see how you guys would price options in a small public company if you were at the helm. For background, this company is pretty damn small at the moment (~$20mm mkt cap), but we're growing! Today our stock is very illiquid for lots of reasons, but mostly just because we don't have news on a day to day basis, the shares aren't really deposit-able, the float is fairly small (due to restrictive stock), whatever...
However, we have an employee stock option plan as a part of our by laws and to date it has stated that options were to be issued at the closing price on the day the options were granted. The problem is, with such an inactive market one idiot guy can move the stock 15-20% (or more) with a $1,000 trade.
The idea here is to use the options as incentive for lower level people and our BOD to hang in there with us through the ups and downs, but if it just so happens that a guys options are 75% out of the money the options are really not all that incentivizing. Ultimately we are looking to get to fair market value. One method we looked at was Black-Scholes, and that is OK, but again the "Stock Price" variable in the calculation is bull shit half the time, depending on recent activity (news, pr, other non-fundamental factors relating to the stock).
Anyway, I would love to hear your thoughts.
Thanks!
StartUpDev
If anybody answers anything other than Black-Scholes, I would really have a lot of questions for them. I thought you had to use Black-Scholes when valuing employee stock options. How else would you do it?
it is black scholes.
OP, for an illiquid company, options may not be the best thing for you or for the employees. perhaps restricted shares plus a ESPP. also, and I don't have the law in front of me, it may make sense to get your broker to set up 10b51 plans for insiders with lots of vested shares if they're going to sell. otherwise the stock could move more wildly around non blackout periods after the market sees insider activity.
side note: that's all theory and most of my employee stock option experience is with execs & founders of larger companies, so usually the market is deep.
another option is: if it's going to move the stock, issue a special dividend to make up for the lost value by shareholders.
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