Stock Options overhang

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Casey Portors

Hi guys,

This may be too technical for the standard listener but I’m hoping you will be able to answer my question.

I know of a company that is attempting to take out a debt package with a lender (A). One of the conditions to the package is that the company must reduce the overhang on the stock from the stock options held by a lender (B) from whom the company previously borrowed money. The company is doing this by attempting to negotiate with the B to increase the number of options held by 2x, but reducing the exercise price to near zero. What I don’t understand is how this will reduce the overhang on the stock.

The only reason I can think of is that the original exercise price required B to pay $$ to exercise the options which they are unable to outlay at the moment. The new, near-zero exercise price negates this requirement so that B can exercise the options without any cash outlay.

Thanks for any thoughts you might have on this!

My email is pencilcase.casey@gmail.com