Barbara Arneson

All other factors being equal, and based on the stock option packages only, we would accept the InterWeb offer because it has a larger upside with strong potential.

When considering the offerqualitatively, we thought that Biogene had the edge because if Barbara wanted to leave before the four years were up, her vested stocks at Biogene would have value, whereas a pre-IPO InterWeb stockoption would be the same price. However, we have chosen to assume that Barbara will work at her job for at least four years, when her stocks fully vest and when InterWeb plans to go IPO.

Biogene•6000 shares at $16/share. Value of fully vested option: $96K
•Two stock price growth models: more mature growth and optimistic rapid growth ◦Mature growth (avg. rate of growth from previous 4 years)■$2.52 EPS ($58M after-tax profit)
■25/1 industry standard P/E ratio
■Value of Barbara’s shares: $378K
■Barbara’s profit: $378K-$96K= $282K

◦Optimistic rapid growth (constant acceleration ofgrowth) ■$6.0 EPS ($138 after-tax profit)
■25/1 industry standard P/E ratio
■Value of Barbara’s shares: $900K
■Barbara’s profit: $900K-$96K= $804K



InterWeb
•60,000 shares at $.10/share.Value of fully vested option: $6K
•Three scenarios: 1) Flop, 2) IPO @ $10/share, 3) IPO @ $15/share ◦Flop. Barbara’s profit: $0.
◦$10/share: $600K. Barbara’s profit: $594K
◦$15/share: $900K.Barbara’s profit: $894K


Info in case says that prospects are very good for both companies. We consider Biogene as a solid bet with basically certain rewards, and InterWeb a healthy gamble with heavyrisk but lots of promise.

The earnings estimates for Biogene can vary widely depending on the type of projected growth. The most conservative scenario we ran was the one with 2.52 EPS, $282K profitfor Barbara. We have created a table of what probability of success a risk-neutral Barbara would have to assign to the risky InterWeb to be indifferent between her various “certain” results...