iRobot 2008 Annual Report Download - page 37

our capital structure from stock option exercises in the future and by providing us better retention tools for our
employees due to the extended vesting terms for the New Options.
Based on the number of outstanding stock options as of March 20, 2009 and assuming (1) a Trailing
Average Price of $13.00, (2) the exchange ratios described below and (3) that all Eligible Options are
exchanged in the Option Exchange Program, we estimate a reduction in our overhang of outstanding stock
options of approximately 658,034 shares. The actual reduction in our overhang that could result from the
Option Exchange Program could vary significantly and is dependent upon a number of factors, including the
actual level of participation in the Option Exchange Program. All Eligible Options that are not exchanged will
remain outstanding and in effect in accordance with their existing terms.
Consideration of Alternatives
When considering how best to continue to incentivize and reward our employees who have out-of-the-
money stock options, the compensation committee engaged an independent compensation consultant,
DolmatConnell & Partners, to review and evaluate strategies to address this issue, including providing specific
recommendations for the Option Exchange Program parameters. Based on its review, DolmatConnell &
Partners presented several potential alternatives to the compensation committee including:
Take no action. This alternative would require us to conclude that the out-of-the-money stock
options would not impact our ability to retain qualified employees by providing competitive compensation
packages. We feel, however, that taking no action would have a negative psychological effect as many of
the outstanding options are substantially out-of-the-money and have a low perceived value by our
employees. In addition, offering valuable equity grants to our employees is warranted based on the
practices of other companies in our vertical markets and geographic region, as well as our view of the
overall competitive landscape for qualified employees.
Increase cash compensation or provide cash retention bonuses. To replace equity incentives, we
considered substantially increasing base and target bonus compensation or providing cash retention
bonuses. Significant increases in cash compensation or bonuses, however, would substantially increase
our compensation expenses and reduce our cash flow from operations, which would adversely affect our
business and operating results and provide shorter term retention incentives than equity compensation.
Grant additional equity compensation. We generally make annual equity grants of stock options
and/or restricted stock units to our highest achieving employees to keep total employee compensation
packages competitive with those of our peer companies from year to year and to generally incentivize
employees. In addition to this year’s annual equity grants, we considered granting employees special
supplemental stock option grants at current market prices to mitigate the loss in value of previously
granted stock options that are now out-of-the-money. While such additional equity grants would provide a
positive psychological effect to employees and enhance retention, such supplemental option grants would
substantially increase our overhang and result in potential additional dilution to our stockholders. It would
also increase our stock compensation expense, which could negatively impact our stock price.
Implement Option Exchange Program. Finally, we considered implementing an option exchange
program. We evaluated various types of option exchange programs, including an option-for-cash exchange
and an option-for-stock exchange, and determined that an option-for-option exchange would best meet
our long-term incentive and retention goals. We determined that a program under which employees could
exchange stock options with an exercise price greater than or equal to the higher of (1) $13.00 or (2) the
Trailing Average Price was most attractive for a number of reasons, including the following:
•Reasonable, Balanced Incentives. We believe that the opportunity to exchange Eligible Options for
New Options exercisable for fewer shares, together with a new minimum vesting requirement,
represents a reasonable and balanced exchange program with the potential for a significant positive
impact on employee retention, motivation and performance.
•Reduction of the Number of Shares Subject to Outstanding Options. In addition to the out-of-the-
money options having little or no retention value, they also would not otherwise reduce our stock option
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Proxy Statement