Session 12: October 29, 2008

Stock Options

Quote of the Day

"Leadership is having a clear idea of what you're trying to accomplish (and) articulating it to whomever you work with... and being able to overcome all the little issues that get in the way of achieving your goals.  But only a leader can overcome the obstacles."  ~ Ralph Waldo Emerson

Summary

Barbara Arneson must decide which job offer to take. With all other factors being equal, she is now down to a decision based on the value of the stock options offered by each company. One company is a public company with easily gathered data on the financial status of the company. The other offer is from a start-up company which has only financial projections.

Required Readings (Policy on Required Readings.)

• Case:
• Barbara Arneson case, Dorf & Byers textbook, p. 585
• Additional articles to read:
• How Stock Options Work from Inc. Magazine
• Watch the following short video clips:
• Guy Kawasaki (garage.com) - Who to Hire
• Eric Schmidt, Larry Page (Google) - Recruiting and Hiring
• David Neeleman (JetBlue) - JetBlue: Defining Organizational Structure and Culture
• Look over the following websites:
  • Paul Graham on startup equity http://paulgraham.com/equity.html
  • Venture/Equity Bundling http://www.startupboy.com/journal/2005/11/30/vc-bundling.html
  • Great Deal with VC's http://venturehacks.com/term-sheet-hacks#more-4
  • Startup Debt vs. Equity http://venturehacks.com/articles/debt-benefits#more-93
• Read the following blogs:
• Venturehacks http://venturehacks.com/
• 500 hats www.500hats.com
• Futuristic Play http://andrewchenblog.com/
• Lessons Learned http://startuplessonslearned.blogspot.com/

Study Questions (Policy on Study Questions.)

1. What is the number of shares outstanding at BioGene as of May 31, 2006? What is its current PE ratio? Why do you think it is higher than the current average of other bioinformatics companies (hint: consider the recent annual growth rates of revenues and profits)?
2. What is Barbara's percentage ownership in each firm?
3. Compare the firms in 4 years (i.e. 2010) when the stock options will be fully vested. Assuming Barbara remains employed until that time, which stock option offer is better? Make sure to include the cost of the stock options and state all critical assumptions.
4. In addition to compensation matters, what other factors would you suggest Barbara consider in making her decision?

Case Analysis (Policy on Case Analyses.)

All other factors being equal, and based on the stock option packages only, I would accept the (BioGene/InterWeb -- choose only one) offer because ... (please submit a numerical analysis along with your assignment, spreadsheet is fine).

Recommended Readings (Policy on Recommended Readings. List of readings)

• Michael Gray, CPA's Incentive Stock Option (ISO) Frequently Asked Questions (skim only)