Biotech Equity is Largely Underwater: Now What?

Alternatives to Option Exchanges or Repricing


Across the life sciences industry, equity is often considered by both executives and employees as a key foundational element within their compensation package. Ask any biotech recruiter — whether they are talking to a newly graduated research associate or a seasoned executive — and one of the most prevalent questions asked is, “What is my equity package?”

In light of the 2022 biotech sector market downturn, many compensation committees and sector leaders are concerned with the percentage of stock option awards that are underwater and contemplating how to manage equity grants and share reserve pressure in 2023 if biotech stock prices remain depressed.

This Viewpoint provides an overview of equity alternatives that can be implemented when faced with underwater stock options instead of repricing or exchanging those options.

The Current Biotech Environment

2022 was a sobering year for the life sciences sector.

  • Total shareholder return (TSR) for the median company in the IBB index (reflecting a market basket of biotechnology stocks) was down -43% during 2022 and -58% from the start of 2021 to the end of 2022.1
  • 119 biotech and pharma companies laid off workers in 20222; this trend is continuing into 2023, with 40 additional life sciences sector companies reporting reductions in force as of March 1, 2023.3
  • Venture capital funding dropped by approximately 23% in 2021, from $39 billion and 1,415 deals to $30.7 billion and 1,054 deals in 2022.4
  • 21% of pre-commercial biotech companies on the IBB index were trading below cash on hand as of
    December 31, 2022, and a number of high-flying biotech companies have closed their doors in the last year due to a lack of funding.
  • Annual equity grant rates across the biotech sector increased in 2022 with select public, pre-commercial biotechs granting as high as 8+% of common shares outstanding. This trend has raised a yellow flag as the typical newly public biotech only has 4% to 5% of authorized shares available for equity grants annually under their approved evergreen provisions.
  • Similarly, overhang levels (the total amount of equity committed to employees and directors) continue to rise, with many smaller bitoechs experiencing overhang of 20% or more due to the fact that stock option recipients are not exercising underwater options.

2023 comes with ambiguous indicators.

  • While biotech investment declined to $30.7 billion in 2022, it was still higher than the $29.6 billion total for 2020 as well as all of the previous years going back to 2012.4
  • According to data released on February 3, 2023, the U.S. unemployment rate was 3.4%, which was last seen in 1969.5 This contrasts with the U.S. inflation rate which slowed from a multi-decade high in 2021 to 6.5% in 2022; still far exceeding the next highest annual U.S. inflation rate in the past ten years of 2.3% experienced in 2019.6
  • According to a Life Sciences Compensation Planning survey conducted by Pay Governance in Q4, 2022, median salary budgets for merit increases in the biotech sector were approximately 4%. When market adjustments are included, total salary budgets ranged from 5.0% to 6.5% (25th – 75th percentiles) within both private and public as well as pre-commercial and commercial participants.
  • Moreover, we are still hearing from biotech companies that hiring, while softening in some areas, remains highly competitive in clinical and technical tracks. This is especially true of biotech companies that are using artificial intelligence and machine learning capabilities to build their platforms.

As the biotech sector grapples with the macroeconomic environment, and pre-commercial companies struggle with shorter cash runways, the pressure on how companies compensate their employees is mounting. At many biotechs, the majority of employee and executive stock option awards are underwater. Further, when companies target their stock option grants to a dollar value, it results in share reserve pools diminishing quickly and annual equity grant use (also known as “burn rates”) climbing to unsustainable levels. Faced with these factors, many biotechs are asking if an option “exchange” or option “repricing” should be considered.

Are Option Exchanges or Repricing the Answer?

It depends.

And that dependency is a result of the company situation and its equity profile.

Before considering how to manage underwater equity, and whether an exchange or repricing is a viable alternative, it is important to understand the “equity profile” of the organization. In other words, understanding what proportion of the stock options previously granted have a grant price higher than the current stock price and, how much higher.

This exercise is especially powerful when viewed on an individual basis and then overlayed onto the critical talent, high potential and key contributor segments of the employee population. A detailed equity profile analysis should consider all equity grants – stock options, restricted stock units and performance shares. For the stock option portion of the equity mix, we suggest analyzing the following:

  • Percent of stock option grants that are vested and underwater, versus percent that are vested and in-the-money.
  • Percent of stock options grants that are unvested and underwater, versus the percent that are unvested and in-the-money.
  • Under each scenario, test what the share price needs to be achieved for the stock options to be “in-the -money.”
  • Under each scenario, calculate the intrinsic value (the spread, if any, between strike price and current trading price multiplied by the number of stock options) to understand the “holding power” of the unvested stock option grants and the “walking power” of the vested stock option grants.
  • For stock option grants that are underwater, whether vested or unvested, identify the remaining terms of the stock options to understand the timeframe by which the stock price needs to exceed the option grant price in order to be “in-the-money” before the option expires.

While many biotech companies may consider option repricing or exchanges as potential approaches to solving the underwater issue, these solutions are relatively rare. Pay Governance’s research found that 29 biotech companies sought shareholder approval for either an option exchange or repricing between 2017 and 2022. Of those 29, all but two received shareholder approval despite the majority of the proposals receiving an “against” vote recommendation from Institutional Shareholder Services (ISS).

The limited use of option exchanges and repricing is due largely to the opinion that such exchanges are not shareholder friendly. A common point raised when discussing option repricing or exchanges is that the employee equity experience should have direct alignment with the shareholder equity experience in both good times and bad. Repricing or exchanging stock options decouples that shared sense of economic outcome. Further, stock options typically have a 7- or 10-year term. In other words, as a “long-term incentive,” stock options are literally designed to reward value creation over the long-term, and their terms should not be altered as a quick fix.

Case Study: CureCo’s Conundrum

Let’s consider an illustrative biotech company: CureCo Therapeutics.

Fictious CureCo went public in the 2021 IPO boom at an IPO price of $17 and is currently trading at $3. The CureCo Compensation Committee and leadership team have concerns regarding retention of key staff as many employees, including some executives, do not value their underwater stock options. CureCo is closely managing its cash expenditures as the cost of raising capital is now much higher than in previous years and additional funding is scarce. This means that meaningful cash retention or recognition awards, even if used in a targeted manner, are not a viable alternative at this time.

CureCo is sensitive to the fact that shareholders may not be supportive of an option exchange proposal given the stock options still have 8 years of their 10-year term left. Further, the stock options are only $14 dollars underwater, and their largest shareholder has already expressed concern that a repricing would signal that the company does not believe the stock price will significantly surpass $17 in the next several years.

CureCo is open to exploring other approaches to equity that do not involve option repricing or exchanges, and, as such — engaged in the process outlined below — selecting several of the alternatives from the equity continuum outlined on the following pages.

Establish a clear equity framework.

Before exploring the continuum of equity alternatives, it is important to ensure that both management and the compensation committee are clear on the company’s equity philosophy and granting framework. For example, does the company grant awards as:

  • Percent of common shares outstanding

         – For example, 4% of common shares outstanding are granted to employees each year

  • Fixed number of shares

         – For example, the same number of shares are granted each year regardless of whether the stock price increases or decreases

  • Targeting a dollar value

        – For example, establishing a target value for the long-term incentive grant based on competitive market rates with the number of shares awarded increasing or decreasing based on the stock price at grant

Other questions to consider are:

  • How many shares remain in the company’s share reserve?
  • Does the company have a share plan “evergreen” feature that annually refreshes the share reserve?
  • Does the company need to obtain shareholder approval for a share pool refresh and is it feasible to make such a proposal at the next annual meeting?
  • From a talent perspective, is the company growing quickly (e.g., increasing hiring as it approaches commercialization or has it recently closed on a meaningful acquisition)?
  • Is the company looking to add any key executive roles that will require competitive new hire equity awards?
  • What is the company’s current annual grant rate and how does the organization’s dilution and equity overhang compare to market norms and shareholder/proxy advisor perspectives?

The methodology that a company uses to determine equity grant size is usually driven by the company’s size and stage as outlined below. Both management and the compensation committee should be clear on what grant methodology is being used, as well as whether conserving shares / stretching the life of the approved share pool is a primary objective when considering changes to the equity granting approach.

Exploring a continuum of equity alternatives.

While there is no silver bullet, many companies pivoted to the use of creative approaches in 2022 to re-engage their employees while conserving their share pool to the extent possible given increasing overhang associated with a larger percent of stock options that were underwater. A continuum of equity approaches is outlined in the following table, with key considerations and market prevalence specific to the biotech sector.


Companies should explore alternatives to address the challenges associated with underwater stock options beyond option exchanges and repricing given the negative shareholder perceptions of these practices.

We recommend that you review your compensation philosophy and equity strategy, assess what talent is needed to successfully execute on your strategy and priorities, understanding that some of this talent most likely is embedded in the organization at the mid-levels and may not be solely residing in the executive suite. Consider what approaches, programs, and rewards are feasible to implement and will resonate best within your company’s unique culture, as well as your shareholder’s expectations. Finally, remember that compensation is just one of many tools that human resources, executive leadership, and the board of directors have at their disposal to engage and retain key talent through turbulent times.


1 Data obtained from Capital IQ (






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