Give Everyone a Prize? Employee Stock Options in Private Venture-backed Firms

43 Pages Posted: 6 Oct 2004  

John R. M. Hand

University of North Carolina Kenan-Flagler Business School

Date Written: December 20, 2005

Abstract

This study investigates the impacts on the equity values of private venture-backed firms of the organizational depth to which they grant employee stock options. I develop two hypotheses. First, applying the reasoning of Demsetz and Lehn (1985), I propose that firms' equity values will be unrelated to the optimal component of stock option grant depths. Second, I hypothesize that firms' equity values will be more negatively related to the suboptimal component of stock option grant depths when options are not granted deeply enough than when they are granted too deeply. The latter asymmetry stems from the differential contribution of senior versus junior employees to equity value. Using the fitted and residual values from a model of stock option grant depths in private venture-backed firms as proxies for the optimal and suboptimal stock option grant depth components, I find evidence consistent with these hypotheses.

Keywords: Broad-based employee stock options, Equity valuation, Private firms, Venture Capital

JEL Classification: G12, G32, J33, M13, M41

Suggested Citation

Hand, John R. M., Give Everyone a Prize? Employee Stock Options in Private Venture-backed Firms (December 20, 2005). Available at SSRN: https://ssrn.com/abstract=599904 or http://dx.doi.org/10.2139/ssrn.599904

John R. M. Hand (Contact Author)

University of North Carolina Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-962-3173 (Phone)
919-962-4727 (Fax)

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