Case 7 Revising the Price of Stock Options
Setting: Software Firm; Your Position: CEO
Ten years ago you founded a high-tech company that develops and produces sophisticated voice recognition software for use on a variety of platforms. You currently employ 300 people, over half of whom are software engineers.
The company went public two years ago, and its shares are currently traded on the NASDAQ. Initially, the promising technology and the predicted fast-growing markets made it easy to attract the necessary capital to grow the business. However, the recent economic downturn has made it more difficult to attract capital as well as to retain employees, many of whom were attracted to the company by stock options.
You are fortunate that your firm has done better than most, although the price of shares has dropped over 50 percent during the last six months. This decline in share price has rendered the options of employees worthless. You are well aware of discontent among employees over this fact. You feel considerable pressure to reprice these options in order to avoid losing employees who are crucial to the company's success. However, you know that such a repricing would cause an unplanned expense to the P & L (profit and loss) statement that is to be released next month.
The business plan has called for a secondary offering of company stock in the next quarter. The success of this offering is dependent on the continued favorable predictions of the analysts who, so far, have been impressed with the company's ability to meet forecasts, despite the downturn. Any substantial reductions in option price could jeopardize this good will.
A decision about what to do must be made shortly. While there is some degree of risk to any action, you feel that you have a pretty good grasp of the issues. On the other hand, you have a meeting with your senior management team later this week. While they are privy to the same knowledge that you have and certainly are dedicated to the success of this company, you know that they would not insist on being involved in such a decision. In a fast moving business such as yours, everyone is aware that involvement is not always possible or desirable. Furthermore, you suspect from past experience that the team members are likely to differ in their beliefs about the best course of action.