Hello,
I have a question regarding a stock option plan in a SME (pe backed) in an exit simulation:
- Options for management: 2% of post money equity value
- Strike price @ 40m equity valuation (100% of equity value pre-money that is also the entry equity for the sponsor)
- It is a private company with a share capital of 10k owned by 2 shareholders, 60% Sponsor ,40% family.
I have confusion regarding the calculation of exit proceeds if the option gets exercised by management.
Please let me know if you agree with the following:
Let's say the Equity Value @ Exit is 100m and management does exercise the 2% option.
If the strike price is @ 40m equity value the management would have to pay the 2% = 40m / (1 - 2%) - 40m = c. 816k in a capital increase right ? At closing the 2% will be worth 2m (100m * 2%). So basically the mgmt would have to do a cap increase @ 40m pre money valuation to have a 2% post money by paying 816k and selling that 2% at exit for 2m for a total net proceed of c. 1.2m.
So the total proceeds should be splitted:
- Mgmt = 2m
- Sponsor = 60% * 0.98 * 100m = 58.8m
- Family = 40% * 0.98 * 100m = 39.2m
My question is: should the capital increase of 816k be calculated as part of the total exit proceeds given that technically is in cash in the company ? ie: should the exit equity value be worth 100.816m now instead of 100m ?
Any comments and considerations are welcomed
BUMP
BUMP - anyone ?
Yes, you include cash provided from option exercise as an addition to equity value before divvying up proceeds amongst all holders (including the exercised options). Treating the exercise cash this way is the equivalent of Treasury Stock Method you likely have performed on public companies.
Obviously doing so will impact all of your numbers above.
Thanks. All clear
Hey I know its super late but why you say it's equivalent of TSM method performed on public companies? Can you elaborate? Thanks!
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