A [Prime]r on Stock Option Repricing in Biotech

Posted August 14th, 2025 by Cody Tranbarger, in Boards and governance, Capital markets, From The Trenches, Governance


By Cody Tranbarger, EIR at Atlas Venture, as part of the From The Trenches feature of LifeSciVC

As the biotech industry trudges through its fourth consecutive year of middling performance and sluggish capital markets, corporate governance has become a salient topic. Such markets invariably reveal the far-too-common instances in which misaligned incentives between investors and operators inform seemingly suboptimal capital allocation decisions and corporate strategies. This time around, disgruntled specialist investors are increasingly engaging in public activism – according to Bloomberg, the number of activist campaigns launched in the healthcare sector grew 61% year-over-year through the first half of 2025.1 One mustn’t look far to find examples in recent headlines, whether they be public spats between funds and companies, such as ADAR1’s proxy battle with Keros2, or specialized vehicles with the sole mandate of acquiring and liquidating “zombie biotechs”, such as Kevin Tang’s Concentra Biosciences3 and Nicholas Johnston’s Alis Biosciences.4

For the most part, recent activist campaigns have targeted underperforming yet overcapitalized biotechs that, following a scientific or clinical failure, are languishing in the market at a valuation well-below their cash balance. In almost all cases, the activists’ objective is to persuade the Board and shareholders to take the actions necessary to tighten strategic focus, reduce cash burn, monetize assets, refresh company leadership, and return excess capital to shareholders, including in some cases, liquidating and de-listing entirely.

These are extreme cases, but there are many other, subtler ways in which bear markets exacerbate misaligned incentives and amplify the corporate governance disputes that result. Among these, compensation is perhaps the most contentious. Indeed, throughout this wave of biotech bear market activism, allegations of excess compensation have been prominent and frequent in well-publicized campaigns, including Sonic Fund’s 2021 proxy battle with Adverum5 and Carl Icahn’s 2023 spat with Illumina.6

Although it doesn’t command the convenient, headline-grabbing power of a lucrative CEO pay package, stock-based compensation practices are an equally important variable in an activists’ review of governance practices and capital stewardship. Therefore, it caught my attention when, a few weeks back, Prime Medicine filed a proposal to reprice more than 8 million outstanding options.7 Given Prime’s recent restructuring and leadership changes8, as well as the stock’s subsequent >200% run, the filing garnered plenty of attention. Although Prime received some ire in public forums, the overwhelmingly apathetic response from investors surprised me; and motivated a deeper dive on the practice of option repricing and its role in our industry.

Before we dive in, I want to be clear that this piece is by no means intended to be a commentary on or criticism of Prime Medicine specifically. In fact, I’m a former Prime employee. My tenure included Prime’s $175 million IPO in October 2022, and much of the stock’s subsequent decline, during which 100% of the options I’d been granted fell deeply underwater. As a result, I never realized equity compensation from Prime, and I am not a shareholder. Despite that, I am deeply grateful for my time at Prime. I’m fortunate to consider many former co-workers as mentors and friends, and I continue to believe that Prime Editing will be enormously impactful for patients. That perspective, I hope, grants me sufficient authority to objectively frame Prime’s ESO repricing proposal within a broader exploration of ESO repricing writ large.

The History, Theory, and Data Underlying ESO Repricing

Since their mainstream emergence in the 1980s, employee stock options (ESOs) have been a cornerstone in the compensation policies of companies in innovative sectors like technology and the life sciences. For pre-profit, cash-constrained startups, stock options are an indispensable weapon in the competition for talent; and an equally valuable tool in motivating and incentivizing that hard-built human capital. Today, roughly 8% of the US private sector workforce – more than 11 million individuals – holds employee stock options,9 a dramatic rise from less than 0.5% in the mid-1990s.10

This system, however, exists in a fragile equilibrium. As Fisher Black and Myron Scholes taught us, the value of an option is much more volatile than the value of its underlying security. This introduces a unique challenge for option-reliant startups given the average rank-and-file employee tends to prefer consistent and predictable earnings. In instances of extreme stress, like a prolonged market downturn, the model often breaks entirely. Options that fall deeply “underwater” – when the strike price far exceeds market price – rapidly lose financial and motivational value; and because the probability of recovery declines exponentially as an option falls further out-of-the-money, deeply underwater options are almost always permanently impaired – absent exogenous intervention, that is.

ESO repricing refers to the corporate action of resetting the exercise price of outstanding options (directly or by exchange) to restore their incentive value. Economic theory regarding ESO repricing can generally be distilled to two opposing dynamics: talent retention and moral hazard. Proponents of ESO repricing argue that underwater options not only fail to motivate, but also actively drive employees out the door. Considering the significant cost of employee turnover12, repricing often represents the most capital-efficient retention mechanism, which serves employees and shareholders alike. Critics, on the other hand, argue that repricing undermines the core principles of equity compensation. First, by disproportionately favoring option holders, repricing actively severs the alignment between employees’ and shareholders’ interests. Second, by effectively rewarding subpar performance, repricing violates the pay-for-performance norms that shareholders expect. Together, these concessions set a dangerous precedent that risks breeding moral hazard.

Both sides make reasonable arguments, and unfortunately, there is no clear answer. Academic literature is decidedly mixed. Regarding employee retention after repricing, for example, there are studies documenting a positive effect13, a negative effect14, no effect15, and divergent effects across executives and employees.16 The picture is similar for post-repricing operational performance13,17,18 and shareholder returns.19,20,21 The debate rages on, and so will we.

Unsurprisingly, the volume ESO repricing events reliably spikes during periods of economic distress. The practice first exploded in the early 2000s aftermath of the dot-com bubble, and again during the great financial crisis less than a decade later. In both cases, as valuations collapsed, hundreds of companies cut the exercise prices of underwater options in a bid to retain and motivate employees. Among them were plenty of present-day household names, including Apple, Nvidia, Google, Starbucks, and many more.22 The practice was controversial from the beginning – headlines like “Potential Boon for Managers Leaves Investors Up in Arms” frequently donned the Wall Street Journal front page during these periods.23 Ultimately, both the dot-com and GFC repricing booms generated enough consternation to force legislative action that established the regulations which govern option repricing to this day.

The late 90s were a “wild west” period for ESO repricing. In those early years, any company could, with a simple majority vote of the board, universally replace high-priced options with new, lower-priced options. In the absence of disclosure requirements, process restrictions, or financial consequences, it’s no surprise the practice became so popular. It’s also no surprise that such a free-for-all didn’t last. By mid-2000, FASB intervened with new guidelines that required gains on repriced options to be recorded as compensation expense, discouraging the practice by shifting risk to the P&L.24 Less than a year later, in 2001, the SEC issued a mandate requiring public filings and risk disclosures for option repricing events;25 and then in 2003, approved new stock exchange listing rules requiring shareholder approval for all material changes to equity plans, including option repricing.26 Finally, in 2005, FASB returned, instituting new fair-value rules that required the expensing repricing-driven increases in option value, and later inspired the adoption of value-neutral option exchanges.27

The resulting regulatory structure has since become solidly entrenched, reinforced by both the sheer volume of repricing events in the late 2000s and the explicit advocacy of proxy advisor firms, which rose to prominence during the same period. Today, therefore, an ESO repricing is carefully choreographed and highly regulated process – a far cry from the wild west of the 90s.

Biotech, the Undisputed World Leader in ESO Repricing

In market-wide terms, ESO repricing is still exceedingly rare – between 2015 and 2022, an average of just 15 repricing proposals were filed annually, cumulatively representing less than 5% of Russell 3000 constituents.28 As the poster child for volatility, it should come as no surprise that biotech punches well-above its weight in this subset. Between 2017 and 2022, biotech and life sciences companies accounted for nearly 40% of all public company ESO repricing proposals, more than twice that of technology, the second highest contributing industry.

Biotech repricing trends have historically tracked those of the market, peaking and troughing in bear and bull markets, respectively. The Covid-era drawdown, however, has generated the largest wave of biotech repricing activity in two decades. Since 2022, more than 40 biotech companies have repriced options. That may seem like a short list relative to the 2023 peak of >200 public life sciences companies trading below cash29, but that contrast reveals a more pervasive dynamic – most companies “fix” underwater options outside the public eye. In some cases, the company’s equity plan contains language explicitly permitting ESO repricing without shareholder approval; and such decisions, made by the compensation committee of the board, are typically buried in SEC filings ex post. In many other cases, companies simply compensate by issuing more shares. For example, annual equity grant “burn rates” spiked in 2022 as newly public biotechs granted as much as 8% of total equity to executives and employees, a significant departure from the historical average of 4-5% annual equity issuance.30 That trend continued in 2023 – among pre-commercial biotechs, the size (as percentage of shares outstanding) of CEO incentive grants increased by 14% year-over-year, despite the share price having fallen an average of 44% in prior year.31 Clearly, even for biotechs that do not reprice, underwater options translate to future dilution, just in a different form.

By comparison, proxy-based ESO repricing seems supremely shareholder-friendly – a plan must be proposed, justified, subjected to scrutiny, and ultimately approved. Even when they’re involved, though, shareholders tend to pull the short straw. Among the 40+ recent ESO repricing events mentioned previously, just over 50% were decided by shareholder vote, but nearly all possessed features traditionally deemed “shareholder unfriendly.” More than 60% included options held by executives and/or directors, and close to 80% were value-dilutive, most often structured as one-for-one exchanges struck at that day’s close. For these reasons, most biotech ESO repricing proposals have received negative recommendations from shareholder advisory firms like ISS and Glass Lewis.30 Yet, the vast majority are approved anyway. In our dataset, more than 90% of proposals survived the shareholder vote.

[Prime]d for Activism?

Let’s return to Prime in that context. Prime had done a nice job of laying the groundwork for its proposal. In the preceding handful of months, Prime had largely reset its pipeline, strategic priorities, and C-suite toward a leaner and more focused operating plan. Although the balance sheet had not been, and still isn’t fully, shored up, Prime seemed a good candidate for a similar reset in its employee equity pool.

Moreover, Prime’s proposal incorporated certain features that align with a reinforce the underlying motives of a repricing. Most prominently, employees and insiders must remain at Prime for 12 and 18 months, respectively, for the new strike price to take effect. Like most of its predecessors, though, Prime’s repricing proposal fails several of ISS and Glass Lewis’ tests of shareholder friendliness. First, structured as a straight price cut to existing options, Prime’s repricing is not “value-neutral” and will both dilute shareholders and flow through Prime’s P&L. Moreover, by setting the new strike price at market – more than 20% below Prime’s 52-week high and 75% below its IPO price – a recovering share price will reward Prime option holders much sooner than it will shareholders. Finally, Prime’s repricing proposal includes executives and board members, who, notably, hold more than half of the 8.3 million options to be repriced. For some, this is quite a lucrative deal – Prime’s newly-appointed CEO individually holds close to 10% of the repriced pool, independent of the 2.5 million options he received along with stepped into the role in May, which were already 2.5x in-the-money at the time of the repricing proposal.32 At least retention won’t be a concern.

The top-heavy concentration and associated dilution certainly place Prime’s repricing proposal toward the “shareholder-unfriendly” extreme of our dataset. Yet, on August 1st, 2025, like nearly all others before it, Prime’s shareholders voted in favor. Indeed, after running the numbers, it’s clear the apathy I noticed was far from an isolated incident. Perhaps investors are simply resigned to accept ESO repricing as a cost of doing business. Perhaps investors just aren’t motivated or incentivized to scrutinize repricing – as we’ve seen, there are shareholder-independent mechanisms to effect similar outcomes, and public pressure might just redistribute dilution to less transparent channels.

On the other hand, with biotech shareholders increasingly advocating (loudly and publicly) for capital efficiency and dilution sensitivity, part of me wonders if ESO repricing practices will wind up in the crosshairs. In case they do, I’ll share some parting thoughts regarding a “shareholder-equitable” repricing framework:

  1. Do the Dirty Work First – the strategic rationale for a repricing is strongest after the organization is right-sized, the pipeline is refocused, the balance sheet is secured, and the go-forward strategy is defined. Most shareholders will gladly accept a clean slate of equity to ensure that the team is properly incentivized to execute on a compelling new strategy.
  2. Give Shareholders a Voice – treat repricing as an opportunity to align incentives with shareholders. For most companies, many of the shareholders who approved the equity plan at IPO will not be those who bear the cost of a future repricing. Executing a repricing via proxy vote demonstrates strong governance, respects shareholders new and old, and builds trust with stakeholders at multiple levels – and as they’re almost always approved, it’s a win-win.
  3. Raise the Standards for Executives – the optics of a retroactive “make-whole” for the very executives that steered the company into its downturn will always be tricky. Shareholders, though, will always be happy to pay for performance. Tying repriced executive grants to the achievement of objective, fundamental milestones (pivotal trial success, IND clearance, etc.) restructures a subsidy for past losses into a forward contract on future value, which maintains all the financial upside for management while closely aligning incentives with shareholders.
  4. Commit to Earning It – repricing at market, as is commonly done, shifts upside value capture disproportionately in favor of employees at the expense of shareholders. In contrast, requiring net new value creation before repriced options are profitable maintains their motivational power, signals confidence, reduces dilution, aligns incentives, and ensures upside is equitably shared.
  5. Make Retention Explicit – there’s no better way to ensure retention than by contractually enforcing it, frequently by instituting a 12-month retention cliff after which the new strike price of repriced options becomes effective. Doing so ensures that both the company and shareholders realize a tangible retention benefit in return for the cost and dilution incurred.
  6. Seriously Consider (Harder) Alternatives – a blanket repricing treats star scientists and marginal performers alike, transferring value indiscriminately and inflating dilution. For many companies, more targeted retention tools, such as RSU refreshes for top-quartile contributors, may represent a more prudent allocation of capital than a company-wide repricing. Equity relief should be earned, not automatic; and shareholders will applaud a management team who is willing to make difficult choices and have hard conversations in the spirit of meritocracy.

Biotech is an industry defined by high highs and low lows. Managing through the lows is an art and science of its own. Whether via repricing or other means, companies and investors must navigate these waters carefully. As the data suggests, repricing employee options can be a valuable tool to recalibrate incentives when used judiciously, but it must be accompanied by transparency, fairness, and a credible strategy for rebuilding shareholder value. Anything less, and one risks merely rearranging deck chairs on the proverbial sinking ship.

  

 

References

  1. Tse, Crystal. “Activist Investors Target $30 Billion Tied Up in Biotech Stocks.” Bloomberg. 21

Jul. 2025.

  1. Feuerstein, Adam. “Biotech Investor Activism Is on the Rise.” STAT News, 22 May 2025.
  2. Feuerstein, Adam. “How to Eliminate Biotech Zombies: Buy Them and Shut Them Down.” STAT News, 27 Feb. 2025.
  3. Dunn, Andrew. “Alis Biosciences to Press Struggling Biotechs during Downturn.” Endpoints News, 18 Apr. 2025.
  4. The Sonic Fund II, L.P. Definitive Proxy Statement (Form DFAN 14A), Accession No. 0001013594‑21‑000418, filed 22 April 2021, U.S. Securities and Exchange Commission.
  5. Liu, John. “Carl Icahn Blasts Illumina for Nearly Doubling CEO’s Pay Despite Steep Drop in Market Value.” CNBC, 31 Mar. 2023.
  6. Prime Medicine, Inc. Definitive Proxy Statement (Form DEF 14A), Accession No. 0001193125‑25‑158716, filed 14 July 2025, U.S. Securities and Exchange Commission.
  7. Prime Medicine. “Prime Medicine Announces Strategic Restructuring to Focus on Opportunities in Large Genetic Liver Diseases, Cystic Fibrosis, and Partnered Programs Alongside CEO Leadership Transition.” 19 May 2025.
  8. Blasi, Joseph, and Douglas Kruse. “Employee Ownership and ESOPs: What We Know from Recent Research.” Aspen Institute, Apr. 2025.
  9. Crimmel, Beth Levin, and Jeffrey L. Schildkraut. “Stock Option Plans Surveyed by NCS: Compensation and Working Conditions.” U.S. Department of Labor, 2001.
  10. Dunford, Benjamin et al. “Underwater Stock Options and Voluntary Executive Turnover: A Multi-Disciplinary Perspective Integrating Behavioral and Economic Theories”. SSRN, 28 June 2007.
  11. G&A Partners. “Calculating the Cost of Employee Turnover.” 11 Jan. 2024.
  12. Callaghan, Sandra Renfro et al. “Does Option Repricing Retain Executives and Improve Future Performance?” 18 Aug. 2003.
  13. Daily, Catherine at al. “Executive Stock Option Repricing: Retention and Performance Reconsidered.” California Management Review., 2002.
  14. Chidambaran, N. K., and Nagpurnanand Prabhala. “Executive Stock Option Repricing, Internal Governance Mechanisms, and Management Turnover.” Journal of Financial Economics, 2003.
  15. Carter, Mary Ellen, and Luann J. Lynch. “The Effect of Stock Option Repricing on Employee Turnover.” Jan. 2003.
  16. Aboody, David et al. “Employee Stock Options and Future Firm Performance: Evidence from Option Repricings.” Journal of Accounting and Economics, May 2010.
  17. Adel, Boubaker and Amira Berrahal. “The Impact of Stock-Options on the Company’s Financial Performance. Bulletin of Business and Economics, 2015.
  18. Chance, Don et al. “The ‘Repricing’ of Executive Stock Options.” Journal of Financial Economics, 2000.
  19. Grein, Barbara, John Hand, and Kenneth Klassen. “The Stock Price Reactions to the Repricing of Employee Stock Options.” SSRN, 8 Apr. 2003.
  20. Vu, Joseph. “The Effect of Option Repricing on Common Stock Returns: An Empirical Investigation.” Investment Management and Financial Innovations, 2005.
  21. Stuart, Alix. “Companies Move to Reprice Employees’ Stock Options.” Wall Street Journal, 12 Sept. 2016.
  22. Scism, Leslie and Joann Lublin. “Potential Boon for Managers Leaves Investors Up in Arms.” Wall Street Journal, 30 Oct. 1998.
  23. FASB Interpretation No. 44 (As Issued): Accounting for Certain Transactions Involving Stock Compensation. March 2000.
  24. U.S. Securities and Exchange Commission, Division of Corporation Finance. “Exemptive Order – Repricing.” Securities and Exchange Act of 1934.
  25. U.S. Securities and Exchange Commission. “New Rules Require Shareholder Approval of Equity Compensation.” Press Release, 30 June 2003.
  26. FASB. “Summary of Statement No. 123 (Revised 2004), Share-Based Payment.” FASB Superseded Standards.
  27. Lida, Oren. “Back to the Future: Option Repricing.” Harvard Law School Forum on Corporate Governance, 16 Apr. 2023.
  28. Stifel. Biopharma Market Update. 14 July 2025.
  29. Wakefield, Olivia, et al. “Biotech Equity Is Largely Underwater: Now What? Alternatives to Option Exchanges or Repricing.” Pay Governance, 14 Mar. 2023.
  30. James, Robert, and Terry Newth. “Juggling Biotech Equity Grant Size, Dilution, and Retention.” Pearl Meyer Advisor Blog, Jan. 2023.
  31. Prime Medicine, Inc. Form 8-K Current Report. U.S. Securities and Exchange Commission, 19 May 2025.

 

 

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