say you are a corporate insider. you were given deep in the money call options that will expire 10 years from now of a profitable growth company that is between fair/slightly overvalued of an ok business that is growing maybe 15 to 30% per year. how would you structure the 105b-1?
would you exercise as it vests which will be a yearly affair? (I think this is bad idea as it get rids of premium too early, and forces you to sell while co is still growing, but it does allow you to diversify)
exercise near expiration? (maximize the call value, risk potential clawbacks, amend in future if price is right, if price shoots up then you will have concentrated risk, if price goes down, then your calls may become worthless!)
or should you exercised based on a certain price? (bad if earnings outgrow price growth and you will be selling a solid company)
Shouldn’t you exercise as you vest? Sure, you may lose some premium, but it’s essentially the opposite of dollar-cost averaging. If a business is growing 15-30% per year, I’d think there’s a fair downside risk.
Waiting for expiration in a growth company (re: unestablished company) is a YOLO worthy of r/WSB.
true. but say the company the is trading at 20x PE. it isnt too overvalued given its growth and current price. the issue truly is that it may been have been jsut profitabe for a couple years, but its sales, earnings, margins, have always been getting better. the unestablish company is really the issue.
keep in mind its not some premium. it is 8 years of premium. lets look at the first year expirations just to keep decision small. given these growth rates the value of options would be this:
constant earnings. price of options at $0.
7% earnings growth. price at 68k.
20% earnings growth. price at 728k.
would you risk 68k now for 728k 8 years later? or i guess the better question, what are you willing to risk now for 728k later.
The trailing 10 year SPY return is 10.4%. Invested over 7 years, that 68k becomes ~137k.
My risk profile is probably very different from yours because a) I graduated from high school in '07 and was highly aware of how shit my job prospects were and b) I now have kids, a mortgage, etc. But I would absolutely take a 75% chance at 137k over a 25% chance of 728k. And frankly, it’s probably more like 85/15 instead of 75/25.