Suppose that Minecrafter goes public at the offer price of $22 per share. Minecrafter wishes to raise $10,000,000 net of all fees. The underwriting spread is 7% and listing fees are $1,000,00
Part Two– Executive compensation The founder of Minecrafter, Ed Smith, received 37,000 executive stock options prior to the IPO. These options expire in five years. The exercise price of these options is $15 per share. Of these options, 25,000 are exercisable and 12,000 have yet to vest and are therefore un-exercisable.
a) What is the total intrinsic value of the exercisable options at the offer price of $22? What is the total intrinsic value of the un-exercisable options at the offer price of $22?
b) Why might Ed Smith wish to exercise the exercisable options prior to expiry?
c) Explain why some options grants may not vest immediately. Why are vesting periods a common feature of executive compensation?
d) Assume Ed Smith’s only form of compensation consists of the executive stock options described above. If six months after the IPO, shares in Minecrafter decline to $0.50 per share, how does this decline affect Ed Smith’s incentives to put in effort into the firm? How might the board of directors of Minecrafter adjust Ed’s option compensation package to address this issue?