IPO Option Overhang Stands at Dotcom Era Levels

November 18, 2003 (PLANSPONSOR.com) - Even in the face of looming stock option expensing, stock option overhang levels in companies launching an initial public offering (IPO) are comparable to those in companies that went public in the mid- to late-1990's.

The medianpost-IPO stock option overhang level –   the sum of shares reserved for outstanding grants plus shares available for future grants as a percentage of common shares outstanding – stood at 19.5% among the 40 companies studied by Presidio Pay Advisors.   This is down from a 26.8% overhang level the sample reported pre-IPO, with post-IPO levels more consistent with overhang levels noted by established public companies (See  Tech Option Grants and Overhang Levels Down ).

Leading the trend were technology companies, who reported post-IPO overhang levels of 21.8%, a number Presidio says is consistent with overhang levels of theearly years of the “dotcom” phenomenon, when median total overhang was approximately 19-20%.   Pre-IPO though, overhang levels were an astronomical 35.0% for technology companies.  

Also consistent with more established companies was theannual “run-rates” – the number of options granted in a year less any cancellations divided by a company’s total shares outstanding.   The median average annual run-rate for companies was 3.2% for the three years prior to IPO.

However, in the months immediately preceding the public offering of a companies stock, companies granted a median of 1.8% of shares outstanding.   On an annualized basis, companies are then granting more options prior to going public than the three-year annual average; a trend Presidio attributes to companies ensuring employees will be able to benefit from the IPO’s success.  

Presidio’s calculations for stock option overhang levels among technology companies are below Watson Wyatt’s earlier calculation of 24.9% (SeeOption Overhang Continues To Increase).   Watson Wyatt attributes the increase in overhang levels to the large number of unexercised options and the trend for technology to compensate its employees more with stock options than other industries.

The complete study is available for download at   http://www.presidiopay.com.