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Pastimes : Clown-Free Zone... sorry, no clowns allowed
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To: LLCF who wrote (5563)7/25/2000 10:11:17 AM
From: Don Lloyd  Read Replies (2) of 436258
 
DAK -

[...You keep talking about this... see my previous post... giving stock to a new employee reduces the marbles for the 'existing' shareholders just as a cash bonus would. Your assertion that options have no economic value is incorrect....]

Yes, the 'existing' shareholders ARE impacted. The point is that the corporation exists as an accountable entity, and the accounting of its revenues, profits, etc. can be calculated without knowing anything about the amount of shares that make up the distribution of ownership. The option grants dilute the existing ownership, and that effect is entirely contained in the resulting increased share count, with no need to additionally adjust the actual revenue or earnings numbers for the company AS A WHOLE.

You need to understand that all economic costs are opportunity costs. If action A precludes some alternative action, the loss of the best precluded alternative is the opportunity cost of action A. If a company decides to distribute new shares to every other passerby in Times Square, not a single operational activity of the company is precluded by such a distribution. The result is as follows:

1. Existing shareholders are negatively impacted by the ownership dilution.
2. Except for ownership structure, the financial variables of the company are unchanged.
3. The passersby receive shares which DO have economic value.

Regards, Don
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