The Latest IPO Bumps
This is my second blog posting on IPO Bumps of VC backed companies. The IPO Bump refers to the difference between a stock option’s exercise price and the price of the company’s shares at the IPO. There has been some speculation on whether 409A rules (among other factors) are leading to the end of the IPO Bump. However, a sampling of recent tech IPOs indicates IPO Bumps are alive and well, although the magnitudes of the Bumps can differ significantly among IPO issuers.
• Zillow, Inc. provides online real estate information. Its IPO occurred on July 20, 2011 at a price of $20.00 per share. The price about one week later was $32.37. Holders of stock options granted in the 18 month period preceding the IPO received positive bumps relative to its issue price. Stock options granted March through May 2010 had exercise prices of $3.25 per share (16% of the issue price). Options granted in March 2011 had exercise prices of $3.89 per share (less than 20% of the issue price). Options granted in May 2011 (two months prior to the IPO) had exercise prices of $6.33 per share (32% of the issue price).
• SkullCandy, Inc. manufactures and distributes headphones. Its IPO occurred on 7/20/2011at a price of $20.00. The price about one week later was $19.70. Holders of stock options granted in May 2010 had an exercise price of $10.32 per share (52% of the issue price). Holders of stock options granted in November 2010 had an exercise price of $12.00 per share (60% of the issue price). Holders of stock options granted in the first quarter of 2011 had an exercise price of $16.42 per share (82% of the issue price).
• Pandora Media, Inc. is a personalized radio service on the Internet. Its IPO occurred on 6/15/2011at a price of $20.00. The price about five weeks later was $15.02. Holders of stock options granted in the fiscal year ending January 2011 had an average exercise price of $2.16 per share (11% of the issue price). Holders of stock options granted in the quarter ending April 30, 2011 had an exercise price of $5.67 per share (28% of the issue price).
• Solazyme, Inc. provides plant based petroleum products. Its IPO occurred on 5/27/2011at a price of $18.00. The price about eight weeks later was $22.07. Holders of stock options granted in the calendar year 2010 had an average exercise price of $4.09 per share (23% of the issue price). Holders of stock options granted in the quarter ending April 30, 2011 had an exercise price of $8.62 per share (48% of the issue price).
IPO Bumps are not necessarily a guarantee of instantaneous riches. Most stock options are subject to vesting limitations over several years (usually four years), so any grants in the period preceding an IPO do not lead to an immediate windfall for the option holder at IPO. The employee will only receive the incremental value if the company itself is able to grow in value in the years after the IPO. Yet the evidence suggests that stock options continue to be an important element of compensation, providing the potential for strong ultimate payouts to the lucky (or hardworking) few who successfully steer their companies towards an IPO exit.
Gunther Hofmann is a Vice President of The Brenner Group and has done extensive work in valuations, M&A, venture capital, and corporate finance with significant international experience in small firms as well as global corporations. Gunther earned a Masters Degree in Electrical Engineering and Business Administration from Darmstadt University of Technology in Germany, and was a Visiting Scholar at UC Berkeley. He is a holder of the Chartered Financial Analyst designation, and a member of the National Association of Certified Valuation Analysts. Gunther is Chairman of the Software/IT Industry Group of the German American Business Association (GABA).
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