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Biotech / Medical : Biotech Valuation -- Ignore unavailable to you. Want to Upgrade?

To: Ian@SI who wrote (3089)	3/14/2001 10:41:56 PM
From: Biomaven	Read Replies (1) \| Respond to of 52153

Ian, Correct. Further, the impact of a given option increases as the share price increases. The way the calculation works, you pretend the (in-the-money) option is exercised, which increases the shares outstanding. You then take the proceeds from the assumed exercise (the amount the employee would have to pay the company to exercise) and pretend to repurchase shares with it at the average stock price for the quarter. The net effect is the dilution. An example: 100 share option with a $10 strike price. If the average stock price for the quarter is also $10, you get a wash (100 shares issued, 100 shares repurchased). If the average price for the quarter is $12, you repurchase 1000/12 shares, or about 83 shares (proceeds of $1000 and price per share of $12). So the net effect of the 100 share option is a dilutive 17 shares (100-83). If the average price for the quarter was $100, the same 100 share option would represent 90 diluted shares. All the above assumes the option was outstanding the whole quarter. The net dilutive effect is decreased if the option was granted (or was cancelled) part way through the quarter. The current regime is actually a simplification of what we used to have (remember diluted and fully diluted?). The system understates potential dilution to the extent it completely ignores out-of-the-money options. OTOH, it also overstates dilution by fully counting unvested options that may never actually vest. Believe it or not, the above description is only the barest bones (think tax benefit from NQ options, convertible debentures, contingently issuable securities, etc.). FAS 128 actually runs over 100 pages of text and examples. Hopefully in a few years this will actually matter to us biofreaks as our companies eventually become profitable. After this short accounting break, we now resume our normal programming.... <g> Peter