Biotech Values

[biomaven0]

>>The bullish signal from these transactions is attenuated to some degree because the exercise prices were very low

We re-visited this issue a while back, and it's not clear that the strike price makes any difference at all or that the early-exercise is ever good.

Very likely it is sub-optimal to ever exercise early - the apparent gains come only if you ignore the extra cash you have to pony-up to avoid selling shares to cover taxes at the time of the exercise.

Here's an example with 100 shares of a $100 stock with a zero exercise price (I think the same result holds with a higher strike price):

1. Exercise and hold now: So there is say a $4000 dollar tax bill assuming a combined federal/state rate of 40%. So you end up with 60 shares each with a $100 basis assuming you sell some shares to cover taxes. (If you don't sell to cover then you are effectively buying more stock now, which distorts the subsequent comparison).

vs.

2. Do nothing now.

So now fast-forward a year. Three cases - stock is at $50, at $100 and at $200. In each case we cash out.

Stock at $50:
early-exercise case: $2k plus a long term tax loss of $2k - call it a total of $2400
do nothing: $5k less $2k taxes - total of $3k.

Stock at $100:
early-exercise case: $4k
do nothing: $10k less $4k taxes - total of $4k.

Stock at $200:
early-exercise case: $12k less a long term taxable gain of $6k - call it a total of $1200 in taxes, for a net of $10.8k
do nothing: $20k less $8k in ordinary income taxes - total of $12k.

(Please check my math here - easy for me to have slipped up).

Of course I wouldn't expect most execs to understand this anyhow, so likely it still is a bullish signal. :)

Peter
(Edit: I have some vague memory of arguing the contrary position at some point - if so, feel free to choose whichever side you prefer.)