Comments on: Two Last Things On Assumption of Stock Options

By: Brad Feld

Brad Feld — Thu, 04 Nov 2010 05:20:34 +0000

If there are no preferred shares, then I have no idea why the options would be priced at a discount to the share price.

By: Steve

Steve — Wed, 03 Nov 2010 22:04:12 +0000

Sorry, I don't understand the rapport. My question relates only to ordinary shares and options thereon; nothing to do with preference shares/preferred stock.
New options are being issued/offered to the market at a huge discount to common stock price on the market. My concern is this will cause ordinary share price to drop [by size of discount], hence I am wondering what is benefit to holder of a full ordinary share. Why would company seek to benefit OPTIONholders at expense of ordinary shareholders? Or am I missing something?

By: Brad Feld

Brad Feld — Wed, 03 Nov 2010 11:39:46 +0000

In a private company, if there is preferred stock that is owned by investors, there is an opportunity (and a goal) by the company to price the common stock lower than the preferred stock (since the preferred stock has rights that the common stock doesn't have.) As a result, the options (which are almost always for common stock) get priced lower than the preferred stock. The amount of the discount varies widely by the stage / state of the company.

By: Steve

Steve — Wed, 03 Nov 2010 08:53:38 +0000

Anyone have any idea why a company would want to issue options to the market at a strike price which effectively puts them immediately 'in the money' to the tune of 20-25%? [i.e. if you were to convert to shares today, you would pay 20-25% less than if you bought an actual ordinary share in the market].
What's the advantage to existing shareholders?
Pros and cons anyone?
Thanks.

By: Dave Jilk

Dave Jilk — Tue, 03 Jan 2006 14:58:02 +0000

This might be clarified for some by pointing out that in a typical company sale, the “price” is often agreed to before any of these details are worked out. Consequently, the seller has to reduce the net consideration to shareholders (and vested optionholders). Another option would be to say that the price is the price and the buyer ALSO has to assume the options, but apparently it isn’t typically negotiated that way. So when you say “recapture” the value of the barter, you’re assuming a particular process that the negotiation typically follows.