15: Venture Finance III (Stock Options)

Wednesday, November 11, 2015
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 equity compensation offered by each company (i.e., the stock options). One company is a public company with easily gathered data on its financial status. The other company is a start-up which has only financial projections. This session is a great chance to learn about the four essentials of stock options: the length of the vesting period, the strike or exercise price, estimating the market price at some future point, and the number of shares currently outstanding at the enterprise.

Quote of the Day: “Fortune sides with him who dares.” Virgil

Study Questions (Policy on Study Questions.)
  • Review the basic formulas and info regarding venture finance:
      • Earnings per Share (EPS) = Earnings / Number of Shares Outstanding
      • Share Price = Earnings per Share * PE Ratio
      • Market Capitalization = Share price * Number of Shares Outstanding
      • Note: "Earnings" is often called Net Income or After-Tax Profit
  • What is the number of shares outstanding for the public company BioGene at the time of the case (2014)? 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.
  • What is Barbara's percentage ownership in each firm?
  • Compare the firms in 4 years (i.e., 2018) 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.
  • In addition to compensation matters, what other factors would you suggest Barbara consider in making her decision?
Required Readings (Policy on Required Readings.)
  • Case: Barbara's Options posted below on this page in PDF form (also available in the Appendix of the Technology Ventures textbook, pages 538-541). Please also review Section 12.8 (Recruiting and Retention) in the textbook. Note: there is a typo on page 539, fourth paragraph. It should read: "BioGene had gone public in June 2013 at $10 per share, ...".
  • Review the E145 slides regarding venture finance from earlier Sessions 9 and 10.
  • How Stock Options Work from Inc. Magazine
  • Notes on PE Ratios from Investopedia
Recommended Readings
Online Assignment (Policy on Case Analyses.) All students submit.

All other factors being equal, and based on the stock option packages only, I would accept the (BioGene/InterWeb -- choose only one) offer because ...

Note: Please submit a numerical analysis along with your assignment. This is an individual assignment. You are encouraged to discuss the case with your teams, but each student must submit his/her own write up reflecting his/her personal decision.