Sara’s Options Harvard Case Solution & Analysis

  1. How does the possibility of early departure impact upon the value of these options?

The options offered to Sara will expire in 5 years, they are offered with the objective to keep Sara with the company for 5 years and to work in her best interest; the vesting period is broken into two parts, roughly half of the options will vest within the first 3 years and the remaining half in the rest of the two years. It can be assumed that the vesting period will be broken into set number of months within the 3 years and remaining 2 years to keep the employee motivated and loyal. The consequences that the employee will face if he leaves his position in the middle of the vesting period is that he will have forfeited the remaining amount of shares; which are initially offered whereas he can exercise the ones whose vesting period had been met.

3 .  What makes the Web Scale options grant different from the Clear Lake options?

  • a.      Advantages and Disadvantages of Indexed Options
  • b.      Valuation Estimates for Web Scale Options Grant
    1. i.        Necessary Variables

    1. ii.      Impact of the Multiplier


The options offered by Clear Lake is Call options whereas, Web Scale is offering outperformance stock options plan (OSO), the benefit generated from the Clear Lake options is from the difference of exercise price and the current market price that they can only be exercised, once Sara has completed the vesting dates. Whereas, the OSO will provide gains when the returns generated by the company are higher than the desired level of the shareholders. If so then it will bring a large pay-off but in case, not then the payoff will be zero, but the biggest difference between the Clear Lake options and the Web Scale options is the fact Web Scale performance is to be judged on its standing on the S&P 500 index.


An indexed option is a financial derivative that gives the holder the right, however, it does not give the commitment to purchase or offer a bushel of stocks, for example the S&P 500, at a concurred upon cost and before a certain date. An index option is like all different options; the difference is that the underlying instruments are indexed. Options contracts, including: file options, permit financial specialists to benefit from a normal business sector move or to diminish the danger of holding the underlying instrument.

Index options give expansion as investors are laid open to countless securities in one exchanging instrument. The level of exposure shifts with the specific index option. Famous index options incorporate S&P 500 Index Options (SPX), Dow Jones Industrial Average Index Options (DJX) and Nasdaq-100 Index Options (NDX). Index options are ordinarily money settled.


The variables that should be considered while conducting the value estimation of the Web scale option grant are as follows:


Market Return:

If Sara wants to receive very larger payoffs from the OSO, then she has to ensure that the company is able to achieve the returns above the level of the market return; which at some point lead to de-motivation as if her performance is exquisite but it is not met by other members of the management that lead to unsuccessful achievement of the targets. Sara has to evaluate if the target can be achieved itself and that whether her efforts will be fruitful or will be wasted completely.


Time is a very important factor for Sara as she needs to see how much time she wants to stay at the company and how much time will she require to be able to enhance the company’s performance in order to achieve the desired targets. 

Market Factors:

Unfavorable market factors can create hindrance for the company to achieve the desired targets, which will affect its position on the S&P 500 index that will make it near to impossible for Sara to get large payoffs, the occurrence and impact of un-controllable factors in the market should be considered while conducting the valuation as they will be making a difference.


The multiplier is a reward for Sara in terms of an increase in number of shares due to improved performance of the company; the multiplier states that the company’s performance on its exchange and compares it to the company’s performance on the S&P 500 index; it specifically shows in what area has the company outperformed in. This variable is a major determinant of the increased number of shares that Sara can receive........................................

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